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FILE PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-70371
Prospectus Supplement
to Prospectus Dated December 6, 1999
2,000,000 Shares
[MIDCOAST LOGO]
Midcoast Energy Resources, Inc.
Common Stock
$16.06 per share
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Midcoast Energy Resources, Inc. is offering 2,000,000 shares of its common
stock. This is a firm commitment underwriting.
Our common stock is listed on the American Stock Exchange under the symbol
"MRS." On December 8, 1999, the last reported sale price of our common stock on
the American Stock Exchange was $16.06 per share.
Investing in our common shares involves risks. See "Risk Factors" on page S-11
of this prospectus supplement.
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Per Share Total
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Price to the public....................... $16.06 $32,125,000
Underwriting discount..................... 0.80 1,600,000
Proceeds to Midcoast...................... 15.26 30,525,000
</TABLE>
We have granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 300,000 additional
shares from us within 30 days following the date of this prospectus supplement
to cover over-allotments.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
CIBC World Markets Prudential Securities
The date of this prospectus supplement is December 8, 1999.
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[MAP]
S-2
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Table of Contents
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PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................ S-5
Risk Factors............................................................. S-11
Use of Proceeds.......................................................... S-17
Capitalization........................................................... S-18
Common Stock Price Range and Dividend Policy............................. S-19
Unaudited Pro Forma Combined Financial Statements........................ S-20
Business and Properties.................................................. S-25
Management............................................................... S-37
Underwriting............................................................. S-39
Legal Matters............................................................ S-41
Experts.................................................................. S-41
Transfer Agents and Registrars........................................... S-41
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PROSPECTUS
About this Prospectus.................................................... 3
Where You Can Find More Information...................................... 3
Incorporation of Certain Documents by Reference.......................... 4
Summary.................................................................. 5
Forward-Looking Statements............................................... 5
Use of Proceeds.......................................................... 6
Ratio of Earnings to Fixed Charges and Earnings to Fixed Charges and
Preferred Stock Dividends............................................... 6
Description of Debt Securities........................................... 6
Description of Capital Stock............................................. 12
Description of Warrants.................................................. 13
Selling Security Holders................................................. 15
Plan of Distribution..................................................... 15
Legal Matters............................................................ 16
Experts.................................................................. 17
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About this Prospectus Supplement
This document is in two parts. The first part is the prospectus supplement,
which describes our business and the specific terms of this offering. The
second part, the base prospectus, gives more general information, some of which
may not apply to this offering. Generally, when we refer only to the
"prospectus," we are referring to both parts combined.
IF THE DESCRIPTION OF THE OFFERING VARIES BETWEEN THE PROSPECTUS SUPPLEMENT AND
THE BASE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS
SUPPLEMENT.
-------------------------
Certain Definitions and Other Information
As used in this prospectus supplement and the accompanying prospectus, the
terms "Midcoast," "we," "us" and "our" refer to Midcoast Energy Resources,
Inc., a company organized under the laws of the State of Texas, and its
subsidiaries (unless the context indicates a different meaning), and the term
"common stock" and "stock" means Midcoast's common stock, $.01 par value.
Unless otherwise stated, all information contained in this prospectus
supplement and the accompanying prospectus assumes no exercise of the over-
allotment option granted to the underwriters.
Pro forma information in this prospectus supplement gives effect to our
acquisition of Kansas Pipeline Company in November 1999.
As used in this prospectus supplement, "MMBtu" means 1,000,000 British thermal
units, "Bcf" means 1,000,000,000 cubic feet of natural gas, "MMcf" means
1,000,000 cubic feet of natural gas and "Mcf" means 1,000 cubic feet of natural
gas. Volumes expressed in cubic feet of natural gas may include quantities of
petroleum liquids. In such cases, petroleum liquids quantities have been
converted to a natural gas equivalent unit basis using a conversion ratio of
one barrel of petroleum liquids to 6 Mcf of natural gas consistent with
industry standards.
Our principal executive offices are located at 1100 Louisiana, Suite 2950,
Houston, Texas 77002 and our telephone number is (713) 650-8900.
S-4
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Prospectus Supplement Summary
This prospectus supplement summary highlights selected information from this
prospectus supplement but may not contain all of the information that is
important to you. This prospectus supplement includes specific terms of the
offering of our common stock, information about our business and financial
data. We encourage you to read this prospectus supplement and the accompanying
prospectus, including the "Risk Factors" section in this prospectus supplement,
and the documents we incorporate by reference, before making an investment
decision.
The Company
We are a rapidly growing pipeline company engaged in the transportation,
gathering, processing and marketing of natural gas and other petroleum
products. We currently own and operate over 3,800 miles of pipeline, including
interstate and intrastate transmission pipelines, end-user pipelines and
gathering systems, with an aggregate daily throughput capacity of approximately
3.0 Bcf per day. In addition, we have four processing and treating plants with
an aggregate throughput capacity of approximately 100 MMcf per day. Our
principal assets are located in Alabama, Kansas, Louisiana, Mississippi,
Missouri, Oklahoma, Texas and Canada. In November 1999, we purchased Kansas
Pipeline Company for $195.2 million. KPC owns and operates an 1,120 mile
regulated natural gas pipeline system that transports natural gas from Oklahoma
and western Kansas to markets in and surrounding Kansas City.
Since 1996, we have grown significantly by acquiring or constructing 71
pipeline systems at an aggregate cost of $362.5 million. As a result of our
growth, our average daily volumes, on a pro forma basis, increased to
approximately 996 MMcf per day for the nine months ended September 30, 1999
from approximately 117 MMcf per day in 1996. In addition, our EBITDA and net
income increased to $16.9 million and $9.1 million, respectively, in 1998 from
$3.1 million and $1.9 million, respectively, in 1996. For the nine months ended
September 30, 1999, our pro forma EBITDA was $31.5 million and pro forma net
income was $6.7 million.
We segregate our business activities into three principal segments:
. Transmission Pipelines. We own and operate one intrastate and three
interstate transmission pipelines. These systems primarily receive and
deliver natural gas to and from other pipelines and also may serve end-user
or gathering functions. Our primary transmission systems are the MIT
system, located principally in northern Alabama along the Tennessee River
Valley, the Midla system, located in Louisiana and Mississippi, and the KPC
system located in Kansas, Missouri and Oklahoma. Our average daily
transmission pipeline volumes increased 1,186% to 450 MMcf per day for the
pro forma nine months ended September 30, 1999 from 35 MMcf per day in
1996. Our Transmission Pipelines segment accounted for $13.2 million or 58%
of our gross margin in 1998 and $29.0 million or 69% of our pro forma gross
margin for the nine months ended September 30, 1999.
. End-User Pipelines. We own and operate 35 end-user systems that provide a
direct supply of natural gas to industrial companies, municipalities and
electric generating facilities through interconnect gas pipelines that we
construct or acquire. Some of our end-user customers include Amoco Chemical
Company, Champion International Corporation, Chevron Chemical Company,
Exxon Chemical Company, Georgia Pacific Corporation and Owens Corning
Corporation. Our average daily end-user volumes increased 456% to 189 MMcf
per day for the pro forma nine months ended September 30, 1999 from 34 MMcf
per day in 1996. Our End-User Pipelines segment accounted for $5.0 million
or 22% of our gross margin in 1998 and $5.7 million or 14% of our pro forma
gross margin for the nine months ended September 30, 1999.
. Gathering Pipelines and Natural Gas Processing. Our 41 gathering systems
typically consist of a network of pipelines that collect natural gas or
crude oil from points near producing wells and transport it to larger
S-5
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pipeline systems for further transmission. Processing revenues are realized
from the extraction and sale of natural gas liquids ("NGLs") as well as the
sale of the residual gas. Our more significant gathering and processing
assets, which were acquired in 1998 and 1999, include our Anadarko/Mendota
system in the Texas Panhandle and western Oklahoma, the Calmar system in
Alberta, Canada, and Dufour Petroleum, Inc., an NGL, crude oil and CO\\2\\
trucking and marketing company. Our average daily gathering and processing
volumes increased 644% to 357 MMcf per day for the pro forma nine months
ended September 30, 1999 from 48 MMcf per day in 1996. Our Gathering
Pipelines and Natural Gas Processing segment accounted for $4.4 million or
19% of our gross margin in 1998 and $7.4 million or 17% of our pro forma
gross margin for the nine months ended September 30, 1999.
Opportunities in Our Industry
The natural gas industry has undergone dramatic change over the past decade
largely due to a series of steps taken by the federal and state governments to
deregulate the industry and increase competition among industry participants.
These actions are causing a major restructuring of the relationships between
interstate pipeline companies, local distribution companies ("LDCs") and their
respective customers and have created opportunities for us to compete for these
customers. We believe the strategic location of our pipelines, our strong
industry relationships and lower cost structure relative to major interstate
carriers and LDCs position us well to continue to take advantage of this
opportunity to expand our customer base.
As the focus of deregulation has shifted to the electric generating industry,
there has been an increasing convergence of the natural gas and electric
industries. There is also a general trend toward the consolidation of companies
within the natural gas industry. These changes have prompted several large
mergers between and among electric utilities and diversified natural gas
companies. Frequently, these combined companies will divest certain of their
natural gas transmission, gathering and processing assets either as a result of
antitrust divestiture requirements or for strategic purposes. As a result, we
believe that these divestitures create considerable acquisition opportunities
for us and that our industry relationships position us to capitalize on these
opportunities.
Business Strategy
Our principal business strategy is to increase our earnings and cash flow by
focusing on accretive acquisitions, pursuing pipeline system and processing
facility construction and expansion opportunities and improving the
profitability of these systems through volume growth initiatives and cost
savings opportunities. We implement this strategy through the following steps:
. Accretive Acquisitions. We seek to acquire natural gas or petroleum liquids
transmission, end-user and gathering pipeline systems and processing plants
that offer the opportunity for operational synergies and the potential for
increased utilization and expansion of the system. We target systems in our
core geographic areas of operation in order to capitalize on existing
infrastructure, personnel and customer relationships to maximize system
profitability. We also seek to acquire assets in other areas with growing
demand for natural gas or increasing drilling activity. These acquisitions
enable us to establish new core areas in which to build a regional
presence. For example, we purchased the Anadarko gas gathering system
located in Texas and Oklahoma in September 1998. The 696-mile system and
processing plant are located in a prolific natural gas producing region and
established a new core geographic area for us. We quickly strengthened our
position in this area in December 1998 with the acquisition of the 35-mile
Mendota system. This system, which included another processing facility,
was interconnected with the Anadarko system, providing access to additional
areas of natural gas production.
. Construction and Expansion Opportunities. We leverage our existing
infrastructure and customer relationships by constructing systems to meet
new or increased demand for pipeline transportation
S-6
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services. These projects include expansion of existing systems and
construction of new pipeline or processing facilities. For example, earlier
this year we constructed new facilities near the southern end of the Midla
system to provide approximately 55 MMcf per day of high pressure natural gas
to two industrial customers. In November 1999, we agreed to construct
additional facilities for one of these customers to supply up to 80 MMcf per
day of natural gas to its natural gas processing plant near Baton Rouge.
. Improving Existing System Profitability. After a system is acquired or
constructed, we begin an aggressive effort to market directly to both
producers and end-users in order to fully utilize the system's capacity. As
part of this process, we focus on providing quality service to our existing
customers while identifying new customers. Many of our existing pipeline
and processing systems were designed with excess throughput capacity that
provides us with opportunities to increase throughput with little
incremental cost and to facilitate higher margin "swing" sales during
periods of increased gas demand. For example, following the purchase of the
MIT system in May 1997, we had increased firm transportation volumes 29% to
170 MMcf per day by the Spring of 1999 from 132 MMcf per day with minimal
additional capital outlays. In addition, we generally seek to achieve
administrative and operational efficiencies by capitalizing on the
geographic proximity of many of our systems.
Recent Developments
Kansas Pipeline Company Acquisition. We acquired KPC and other related entities
in November 1999 for approximately $195.2 million. KPC owns and operates an
1,120 mile regulated interstate natural gas pipeline system. The system extends
into two major segments from northwestern and northeastern Oklahoma through
Wichita into the Kansas City metropolitan area. The system's two principal
customers are divisions of ONEOK, Inc. and Southern Union Company, which are
the local distribution companies for Wichita and Kansas City. KPC derives 97%
of its gross margin from a series of long-term transportation contracts with
these two principal customers. KPC is capable of delivering approximately 140
MMcf per day and 21 MMcf per day of natural gas into the Kansas City and
Wichita marketplaces, respectively. KPC is one of only three pipeline systems
currently capable of delivering gas into the Kansas City metropolitan market.
New Credit Facility. In connection with the KPC acquisition described above, we
entered into a $265 million credit facility (subject to increase to up to $400
million under certain conditions).
Gloria System Acquisition. In October, 1999 the FERC approved the abandonment
of the Gloria system from interstate service, which, following the expiration
of the required notice period, enabled us to proceed to close the Gloria system
acquisition. We plan to complete the Gloria system acquisition following this
offering. See "Business and Properties."
S-7
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The Offering
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Common stock offered......................... 2,000,000 shares
Common stock outstanding after the offering.. 12,721,980 shares
Use of proceeds.............................. The net proceeds from the sale
of the common stock we are
offering in this prospectus
supplement will be used to repay
bank indebtedness we have
incurred in connection with our
recent acquisitions, to complete
the Gloria system acquisition
and to provide liquidity for
future acquisitions, system
expansions and other general
corporate purposes. See "Use of
Proceeds."
American Stock Exchange symbol............... MRS
</TABLE>
The number of outstanding shares shown above is based on 10,721,980 outstanding
shares at September 30, 1999 and excludes:
. up to 300,000 shares that may be sold to the underwriters upon exercise of
their over-allotment option;
. 137,500 shares of common stock issuable upon exercise of outstanding
warrants to purchase our common stock exercisable at $10.327 per share;
. 171,880 shares issuable upon exercise of outstanding warrants to purchase
our common stock exercisable at $15.818 per share; and
. 544,689 shares reserved for issuance upon the exercise of outstanding stock
options under our stock option plans.
S-8
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Summary Historical and Pro Forma Consolidated Financial and Operating
Information
The summary historical consolidated financial information for the years ended
December 31, 1996, 1997 and 1998, for the nine months ended September 30, 1998
and 1999, and the pro forma financial information for the year ended December
31, 1998 and the nine months ended September 30, 1999, is derived from and
should be read in conjunction with our consolidated financial statements and
accompanying notes, which are incorporated by reference in this prospectus
supplement and the accompanying prospectus, and the pro forma financial
statements and accompanying notes included herein. The pro forma information
gives effect to our acquisition of KPC.
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Historical Pro Forma
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Nine Months
Nine Months Ended Year Ended Ended
Year Ended December 31, September 30, December 31, September 30,
--------------------------- ------------------ ------------ -------------
1996 1997 1998 1998 1999 1998 1999
------- -------- -------- -------- -------- ------------ -------------
(unaudited) (unaudited)
(in thousands, except per share amounts)
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Statements of Income:
Operating revenues...... $29,415 $112,744 $234,069 $167,185 $267,365 $288,215 $299,409
Operating income........ 2,573 7,291 13,553 9,273 13,930 28,401 21,355
Interest expense........ 413 1,067 3,247 2,043 3,651 17,264 14,228
Income before income
taxes.................. 1,914 5,914 10,422 7,316 10,136 11,317 7,034
Net income to common
shareholders........... 1,891 5,764 9,113 6,069 8,589 9,650 6,728
Per Share Data(1):
Earnings Per Common
Share
Basic................... $ 0.73 $ 1.13 $ 1.29 $ 0.85 $ 1.00 $ 1.36 $ 0.78
Diluted................. 0.73 1.10 1.25 0.82 0.98 1.32 0.76
Weighted average number
of common
shares outstanding
Basic................... 2,593 5,115 7,074 7,120 8,585 7,074 8,585
Diluted................. 2,598 5,251 7,298 7,358 8,804 7,298 8,804
Other Data:
Depreciation, depletion
and amortization....... $ 818 $ 1,592 $ 3,197 $ 2,202 $ 4,793 $ 9,983 $ 10,223
General and
administrative......... 1,412 3,526 6,317 4,353 5,936 10,165 11,776
EBITDA (2).............. 3,145 8,573 16,866 11,561 18,580 38,564 31,485
Cash flows from
operating activities... 2,564 3,856 17,169 7,474 5,162
Cash flows from
investing activities... (8,842) (62,497) (60,587) (46,579) (49,373)
Cash flows from
financing activities... 7,340 57,781 43,310 39,393 45,479
Capital expenditures.... 1,028 1,410 7,816 4,341 14,788 11,259 16,034
Acquisitions, net of
cash acquired.......... 8,363 60,778 52,076 41,025 34,388
</TABLE>
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As of September 30, 1999
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Pro Forma
as Adjusted for
Historical Pro Forma this Offering
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(unaudited)
(balance sheet data in thousands)
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Balance Sheet Data:
Working capital........................ $ 1,610 $ (8,172) $ (8,172)
Property, plant and equipment, net..... 201,648 384,272 390,272
Total assets........................... 255,084 459,243 465,243
Long-term debt, net of current
portion............................... 63,395 247,848 223,323
Shareholders' equity................... 128,182 128,182 158,707
Operating Data:
Miles of pipeline(3)................... 2,705 3,825
Number of operating systems:
Interstate Transmission................ 2 3
Intrastate Transmission................ 1 1
End-User............................... 35 35
Gathering.............................. 41 41
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Total operating systems............... 79 80
======== ========
Average daily volume (MMcf per day).... 827(4) 996
Daily volume capacity (MMcf per day)... 2,851 3,011
</TABLE>
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(1) Gives effect to a 10% stock dividend paid on March 2, 1998 and a five-for-
four stock split effected on March 1, 1999.
(2) "EBITDA" represents net income before income taxes, net interest expense,
depreciation, depletion and amortization. EBITDA is not a measure of
financial performance under GAAP and may not be comparable to other
similarly titled measures used by other companies. Accordingly, it does not
represent net income or cash flows from operations as defined by GAAP and
does not necessarily indicate that cash flows will be sufficient to fund
cash needs. As a result, EBITDA should not be considered an alternative to
net income as an indicator of operating performance or to cash flows as a
measure of liquidity. We incur significant capital expenditures and incur
debt, primarily related to acquisitions that are not reflected in EBITDA.
We have included information concerning EBITDA because we understand that
it is used by analysts and some investors as a relevant measure of
financial performance.
(3) Includes all active pipeline mileage in which we own an interest.
(4) Average daily volume information is approximate and is based on total
volumes transported during the nine-month period, except for systems
acquired during that period, the average daily volumes of which are based
on total volumes transported from the date of acquisition or initial
operation through the end of the period.
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Risk Factors
An investment in our common stock involves significant risks. You should also
carefully read and consider all of the information we have included, or
incorporated by reference, in this prospectus supplement and the accompanying
prospectus before you decide to buy our common stock.
Our acquisition strategy may be difficult to maintain
One of our business strategies is to grow through acquisitions. Implementing
this strategy requires us to continue to identify attractive or willing
acquisition candidates and to acquire such candidates on economically
acceptable terms. However, there can be no assurance that we will continue to
be able to successfully identify and purchase attractive acquisition
candidates. Nor can we be assured of acquiring such candidates at a pace
necessary to maintain our current rate of growth. We cannot guarantee that
other companies will not also compete with us for acquisition candidates.
Future competitors may have greater financial resources than us to finance
acquisition opportunities and might be willing to pay higher prices for the
same acquisition opportunities. Such competition could have the effect of
increasing the price of acquisitions or reducing the number of suitable
acquisition candidates.
We could have difficulty integrating our acquisitions
If we are unable to manage growth effectively or to successfully integrate new
acquisitions into our existing operations, our business and our financial
results could be materially adversely affected. Pursuing our acquisition
strategy in the future could result in period-to-period fluctuations in our
financial position and results of operations. We could have difficulty
assimilating the acquired operations, including implementing common information
systems and standardizing certain operating and financial reporting procedures.
If we do not successfully integrate the acquired companies or assets and
implement consistent overall business, accounting and reporting controls,
inconsistent operating and financial practices could result. Such
inconsistencies could negate the benefits to be derived from a cohesive,
efficient enterprise.
We have a limited operating history for a significant portion of our
operations. From January 1, 1996 to December 31, 1998, we have acquired or
constructed 40 pipeline systems, which collectively comprised $231 million or
99% of our revenues for the fiscal year ended December 31, 1998. In addition,
we acquired 31 pipeline systems during 1999. We may experience difficulties
with customers, personnel or operations as we integrate our recent
acquisitions. If we are unable to successfully integrate any significant
acquisition, particularly the KPC acquisition, our results of operations and
financial condition could be materially adversely affected.
Our rapid growth strains our resources
Our acquisition and growth strategy and the resulting rapid growth may strain
our existing resources because rapid growth:
. is capital intensive and requires us to continue to invest in operational,
financial and management information systems;
. involves the reallocation of significant amounts of capital from operating
initiatives, such as capital improvements and expansions, placing us at
risk from a lack of capital resources in key business areas;
. strains our human resources, placing added emphasis on our ability to
attract, retain, motivate and effectively manage our employees; and
. may divert management's attention from operating matters to acquisitions.
These burdens could have a material adverse effect on our results.
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The rates we are able to charge our customers may be reduced by governmental
authorities
Our pipeline business is regulated by the FERC and various state and local
regulatory agencies. In particular, the FERC limits the rates we are permitted
to charge our customers for interstate transportation. If the rates we are
permitted to charge our customers for use of our regulated pipelines are
lowered, the profitability of our pipeline businesses may be reduced.
Our recently acquired KPC system is a FERC regulated interstate pipeline and is
currently involved in a rate case. The rate case was filed on August 27, 1999
at the direction of the FERC. The filing will determine whether the rates
proposed by KPC are just and reasonable. Two of our customers and the state
regulatory commissions that regulate them have filed interventions and protests
with respect to our request. Formal negotiations for the settlement of the rate
case have not yet commenced, and it is impossible to determine the outcome of
the rate case at this time. In addition, it is possible that the FERC will
order a reduction in the rates below the level of our preliminary approved
rates. Such a determination could have an adverse effect on our revenue and
cash flow.
The acquisition of assets and businesses entails uncertain risks
There are risks and uncertainties associated with the acquisition of assets and
businesses, including but not limited to:
. undiscovered and unidentified acquisition liabilities, including
liabilities arising from non-compliance with governmental regulation and
environmental laws by former owners for which we, as the new owner, may be
liable;
. failure of acquired companies or pipeline systems to achieve the financial
results projected in our valuation models; and
. unanticipated operating problems or legal liabilities.
We may have difficulty securing additional financing, and our activities may be
restricted by debt covenants
Our growth strategy is capital intensive and depends on our ability to
successfully acquire or construct additional pipeline systems. Our ability to
implement this strategy depends upon our ability to obtain financing for such
acquisitions and construction projects. To date, we have satisfied
substantially all of our working capital needs through cash flow from
operations, the public sale of common stock, borrowings under our credit
facilities and other short-term borrowings. Substantially all of our assets are
pledged to secure our $265 million credit facility. As of December 8, 1999, we
had approximately $265 million of outstanding indebtedness under our $265
million credit facility which matures on November 8, 2004. In addition, there
is currently $1.6 million in accrued interest under the facility. Our pro forma
September 30, 1999 ratio of long-term debt to total capitalization (i.e., long-
term debt divided by the sum of long-term debt and shareholders equity) was
approximately 66%. Our debt could adversely affect our ability to obtain
additional financing for working capital, acquisitions or other purposes.
We have no current commitments or arrangements for longer term financing beyond
the maturity date of $265 million credit facility on November 8, 2004.
Furthermore, there is no assurance that we will not need additional funds to
implement our growth strategy, or that any needed longer term financing funds
will be available, if at all, on acceptable terms. We will need to refinance
any balances due under our $265 million credit facility on November 8, 2004 if
that facility is not renewed. If we are unable to refinance or raise additional
funds, it will have a material adverse effect on our operations. If we raise
funds by selling additional equity securities, your share ownership will be
diluted. Our $265 million credit facility also contains a number of significant
covenants limiting our ability to, among other things, borrow additional money,
transfer or sell assets, invest in or acquire other entities, expand the lines
of business of the company or our subsidiaries, create liens and enter into a
merger or consolidation. These covenants also require us to meet certain
financial tests. If we are unable to meet our debt service obligations or to
comply with these covenants, there would be a default under our $265 million
credit facility. Such a default, if not waived, could result in acceleration of
the repayment of our debt and have a material adverse effect on our operations.
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If any customer fails to perform its contractual obligations, our financial
position, results of operations and cash flows could be adversely impacted
We have two customers that account for over 10% of our pro forma gross margin.
If one of these customers fails to perform its contractual obligations and we
are unable to recontract its natural gas or collect monies owed to us, our
financial position could be adversely impacted.
Based on their share of our pro forma gross margin, as of September 30, 1999,
our two largest customers are Kansas Gas Service and Missouri Gas Energy. These
customers accounted for 27% and 16%, respectively, of our pro forma gross
margin for the nine months ended September 30, 1999.
We rely on key personnel
We believe that our ability to successfully implement our business strategy and
to operate profitably depends on the continued employment of our senior
management team led by Mr. Dan C. Tutcher. We have entered into employment
agreements with the senior management team that contain non-competition
provisions. Notwithstanding these agreements, we may not be able to retain our
senior management team and may not be able to enforce the non-competition
provisions in the employment agreements. If Mr. Tutcher or other members of the
senior management team become unable or unwilling to continue in their present
positions, our business and financial results could be materially adversely
affected.
Because of the highly competitive nature of the pipeline business, we may not
be able to retain existing customers or acquire new customers
Competition is intense in many of our markets. Some of our competitors have
greater financial resources and access to larger supplies of natural gas than
those available to us. These resources could allow those competitors to price
their services more aggressively than we do, which could hurt our
profitability.
We cannot give any assurances that we will be able to renew or replace our
current contracts as they expire. The renewal or replacement of existing long-
term contracts with our customers at rates sufficient to current revenues and
cash flows depends on a number of factors beyond our control, including:
. competition from other pipelines; and
. the price of, and demand for, natural gas in markets served.
Completion of the Southern Natural Gas pipeline in Alabama may adversely impact
our revenues and cash flow
Southern Natural Gas has received regulatory approval and begun construction of
a 110-mile pipeline from Tuscaloosa, Alabama to north Alabama. The regulatory
approval has been appealed to the Court of Appeals. Two of our customers,
accounting for $2.4 million of our gross margin for the year ended December 31,
1998, have entered into 20-year contracts for Southern Natural Gas to provide
natural gas transportation services if the proposed pipeline is completed.
Because these contracts with Southern Natural Gas cover substantially all of
the current natural gas requirements of these two customers, we will lose the
revenue and cash flow from these firm transportation gas volumes unless these
customers have increased natural gas requirements and we are able to renew the
contracts or we are able to obtain new customers prior to the expiration of our
contracts with these customers in 2003.
We could be adversely affected by governmental regulation
Our interstate pipeline systems are subject to many restrictions mandated by
the FERC. The restrictions are subject to change and could affect these systems
to various degrees. The significant interstate regulatory factors
S-13
<PAGE>
that have previously affected these systems or could affect these systems from
time to time include the following:
. inability to obtain timely FERC authorization for additional allowable
firm throughput or for rate increases;
. attempts by large volume customers or gas suppliers to construct gas
facilities connecting to another pipeline or other source of gas supply in
order to bypass our systems; and
. uncertainties related to regulation of interstate pipelines that supply
distribution companies.
The construction, operation, maintenance and safety of our intrastate pipelines
are typically regulated by the state regulatory commissions with jurisdictional
authority, and our Calmar system is regulated by Canadian authorities. It is
possible that future state or Canadian regulatory measures will adversely
affect our intrastate or Canadian business and financial results. In such
events, the state's or Canada's regulatory authorities could temporarily
suspend or hinder operations in their particular jurisdiction.
Our gas marketing operations involve market and price risks
As part of our gas marketing activities, we purchase natural gas at a price
determined by prevailing market conditions. Simultaneously with our purchase of
natural gas, we generally resell natural gas at a higher price under a sales
contract that is comparable in terms to our purchase contract, including any
price escalation provisions. In most instances, small margins are
characteristic of natural gas marketing because there are numerous companies of
greatly varying size and financial capacity who compete with us in the
marketing of natural gas. The profitability of our natural gas marketing
operations depends on the following factors:
. our responsiveness to changing markets and our ability to negotiate
natural gas purchase and sales agreements in changing markets;
. reluctance of end-users to enter into long-term purchase contracts;
. consumers' willingness to use other fuels when natural gas prices get too
high;
. timing of imbalance or volume discrepancy corrections and their impact on
financial results; and
. the ability of our customers to make timely payment.
Our results are affected by fluctuations in demand due to weather
We experience quarter-to-quarter fluctuations in our financial results because
our natural gas sales and pipeline throughputs are affected by changes in
demand for natural gas, primarily because of the weather. In particular, demand
on the Magnolia, KPC, MIT and Midla systems fluctuates due to weather
variations because of the large municipal and other seasonal customers that are
served by the respective systems. As a result, the winter months have
historically generated more income than summer months on these systems. There
can be no assurances that our efforts to minimize such effects will have any
impact on future quarter-to-quarter fluctuations resulting from seasonal demand
patterns.
Our profitability is affected by the volatility of natural gas liquids and
natural gas prices
The profitability of our natural gas processing operations is affected by
volatility in prevailing NGL and natural gas prices. This business segment
contributed $2.7 million or approximately 12% of our gross margin for the year
ended December 31, 1998 and $1.5 million or approximately 3% of our pro forma
gross margin for the nine months ended September 30, 1999. NGL and natural gas
prices have been subject to significant volatility in recent years in response
to relatively minor changes in the supply and demand for NGLs and natural gas,
market uncertainty and a variety of additional factors that are beyond our
control. Our acquisitions of the Anadarko system in September 1998, the Mendota
system in December 1998, and Flare, L.L.C. in March 1999, which included
additional natural gas processing facilities, have increased our sensitivity to
NGL and natural gas price fluctuations.
S-14
<PAGE>
We are subject to liabilities and costs under environmental laws
Our operations are subject to federal, state and local laws and regulations,
including those relating to the protection of the environment, natural
resources, health and safety, waste management, and transportation of
hydrocarbons and chemicals. Sanctions for noncompliance may include
administrative, civil and criminal penalties, revocation of permits and
corrective action orders. Environmental laws have become more stringent over
the years. These laws sometimes apply retroactively. As a result of our
historical waste disposal practices, we may incur material environmental costs
and liabilities that may not be covered by insurance. In addition, a party can
be liable for environmental damage without regard to that party's negligence or
fault. Therefore, we could have liability for the conduct of others, or for
acts that were in compliance with all applicable laws at the time we performed
them. There also may be no assurance that we have discovered and identified all
acquisition liabilities, including liabilities arising from non-compliance with
governmental regulation and environmental laws by former owners, and for which
we, as the new owner, may be responsible.
Our operations are subject to many hazards and operating risks that may not be
covered fully by insurance
Our operations are subject to many hazards. These hazards include:
. damage to pipelines, related equipment and surrounding properties caused
by hurricanes, floods, fires and other natural disasters;
. inadvertent damage from construction and farm equipment;
. leakage of natural gas and other hydrocarbons;
. fires and explosions; and
. other hazards, including those associated with sour gas, that could also
result in personal injury and loss of life, pollution and suspension of
operations.
We have insurance to protect against many of these liabilities. This insurance
is capped at certain levels and does not provide coverage for all liabilities.
Our insurance may not be adequate to cover all losses or liabilities that we
might incur in our operations. Moreover, we may not be able to maintain
insurance at adequate levels or at reasonable rates. Particular types of
coverage are not currently available and may not be available in the future.
Because 44% of our gross margin on a pro forma basis is derived from the KPC
system, if catastrophic conditions occur that interrupt delivery of gas from
that system, the profitability of our operations could be adversely affected.
We could be adversely affected by inadequate gas supplies
If we are unable to maintain the throughput on our gathering systems at current
levels by accessing new natural gas supplies to offset the natural decline in
reserves, our business and financial results could be materially adversely
affected. We purchase substantially all of our natural gas on the spot market.
These purchase contracts may be affected by factors beyond our control such as:
. capacity restraints;
. temporary regional supply shortages;
. lack of new drilling activity;
. inability of wells to deliver gas at required pipeline quality and
pressure; and
. depletion of reserves.
There is no assurance we will continue to declare dividends in the future
Our common stockholders may receive dividends out of legally available funds
if, and when, they are declared by our board of directors. Our current policy
is to declare quarterly cash dividends at a rate of $.07 per share of
S-15
<PAGE>
common stock. The amount of future cash dividends, if any, will depend upon
future earnings, results of operations, capital requirements, covenants
contained in our various financing agreements, our financial condition and
certain other factors. We cannot assure you that dividends will be paid in the
future.
Our ability to issue preferred stock may make it difficult for a third party to
acquire us
Certain provisions of our articles of incorporation could make it more
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to our stockholders. The articles of incorporation
allow us to issue preferred stock without stockholder approval. Issuances of
preferred stock could make it difficult for a third party to acquire us.
Sales of significant amounts of our common stock could adversely affect its
market price
The market price of our common stock could drop due to sales of a large number
of shares of our common stock or the perception that such sales could occur.
These factors could also make it more difficult to raise funds through future
offerings of common stock.
After this offering, approximately 12.7 million shares of our common stock will
be outstanding (approximately 13.0 million shares if the underwriters over-
allotment option is exercised in full), based on the number of shares
outstanding at September 30, 1999. Of these shares, the 2.0 million shares sold
in this offering (2.3 million shares if the underwriters over-allotment option
is exercised in full) will be freely tradeable without restrictions under the
Securities Act of 1933, as amended ("Securities Act"), except for any shares
purchased by "affiliates" of the company (as defined in Rule 144 under the
Securities Act). Our officers and directors have entered into lock-up
agreements pursuant to which they have agreed not to offer or sell any shares
of common stock for a period of 180 days after the date of this prospectus
supplement without the prior written consent of CIBC World Markets Corp., on
behalf of the underwriters, except that Mr. Ted Collins' lock-up agreement does
not cover approximately one-half of the 541,097 shares of common stock
(including 139,496 shares issuable upon exercise of a warrant) beneficially
owned by a corporation in which he is a shareholder. Also, CIBC World Markets
Corp. may, at any time and without notice, waive the terms of these lock-up
agreements specified in the underwriting agreement.
Year 2000 issues could affect us
We strive to ensure that our information systems are able to recognize and
process date-sensitive information properly as the year 2000 approaches.
Systems that do not properly recognize and process this information could
generate erroneous data or even fail. We have completed the assessment of our
key computer systems and have identified a number of systems that could be
affected by the year 2000 issue. We have completed the upgrade of these systems
to allow them to function properly. If these steps are not completed
successfully in a timely manner or if third parties with whom we do business
fail to sufficiently address their year 2000 issues, our business and financial
results could be materially adversely affected by disruptions in operations.
There is a limited trading market for our common stock
Our common stock is traded on the American Stock Exchange. Average daily
trading volume for our common stock, as reported by the AMEX for the third
quarter of 1999, was approximately 30,245 shares. Despite the increase in the
number of shares of common stock to be publicly held as a result of this
offering, should additional equity be issued, we cannot assure you that a more
active trading market will develop. Because there is a small public float in
our common stock and it is thinly traded, sales of small amounts of common
stock in the public market could materially adversely affect the market price
for our common stock. If a more active market does not develop, we may not be
able to sell shares in the future promptly, for prices that we deem
appropriate, or perhaps at all.
S-16
<PAGE>
Use of Proceeds
We estimate our net proceeds from the sale of the 2,000,000 shares of common
stock we are offering to be approximately $30.5 million ($35.1 million if the
underwriters exercise their over-allotment option in full). This estimate
assumes a public offering price of $16.06 per share and includes the deduction
of an underwriting discount and the estimated offering expenses to be paid by
us.
The net proceeds from the sale of the common stock we are offering in this
prospectus supplement will be used:
. to repay bank indebtedness we have incurred in connection with our recent
acquisitions;
. to complete the Gloria system acquisition; and
. to provide liquidity for future acquisitions, system expansions and other
general corporate purposes.
Until funds are required for such purposes, the proceeds may be invested in
short-term money market instruments.
New Credit Facility. Approximately $24.5 million of the proceeds will be used
to pay down the $265 million credit facility that we entered into in connection
with the KPC acquisition. We currently have $265 million outstanding under our
credit facility with a floating interest rate based on the federal funds rate.
In addition, there is currently $1.6 million accrued interest on the facility.
The $265 million credit facility matures on November 8, 2004. The initial loans
under the $265 million credit facility were used to refinance our indebtedness
under our prior credit facility and to finance the KPC acquisition (including
the refinancing of certain promissory notes in connection therewith). Following
the reduction of our $265 million credit facility with the proceeds of this
offering, the outstanding long-term indebtedness under the credit facility will
be approximately $240.5 million ($235.9 million if the underwriters exercise
their over-allotment option in full), and the available borrowings thereunder
will be approximately $24.5 million.
Other loans under the facility may be used to finance capital expenditure and
acquisitions, refinance amounts due with respect to draws under letters of
credit, to provide working capital for our operations and for other general
business purposes. Letters of credit under the credit agreement may be used for
any general corporate purpose, with certain limited exceptions.
Our obligations under the credit facility are secured by guarantees from each
of our wholly-owned domestic subsidiaries and substantially all of our and our
domestic subsidiaries' assets.
In the ordinary course of business, we occasionally guarantee all or part of
the debt of joint ventures and partnerships with whom we do business.
Gloria System. Approximately $6 million of the proceeds will be used to close
the Gloria system acquisition, which had been awaiting FERC approval.
S-17
<PAGE>
Capitalization
The following table sets forth as of September 30, 1999:
. our historical capitalization; and
. our pro forma capitalization for the KPC acquisition and as further
adjusted to show the receipt of the estimated net proceeds from the sale
of our common stock being sold in this offering and the use of a portion
of such proceeds to pay down bank borrowings and to complete the Gloria
System acquisition.
This table should be read in conjunction with the historical and pro forma
financial information included elsewhere in this prospectus supplement and the
accompanying prospectus and the consolidated financial statements and the
related notes thereto incorporated by reference in this prospectus supplement.
<TABLE>
<CAPTION>
As of September 30, 1999
---------------------------------
Pro Forma
As Adjusted
for this
Historical Pro Forma Offering
---------- --------- -----------
(unaudited)
($ in thousands)
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 1,468 $ 1,468 $ 1,468
======== ======== ========
Long-term debt:
Bank borrowings.............................. $ 63,395 $247,848 $223,323
-------- -------- --------
Shareholders' equity:
Common stock, $.01 par value; 31,250,000
million shares authorized (1); 10,721,980
shares issued and outstanding, 12,721,980
issued and outstanding as adjusted for this
offering.................................... 107 107 127
Paid-in capital.............................. 135,544 135,544 166,049
Accumulated deficit.......................... (5,094) (5,094) (5,094)
Treasury stock (at cost), 161,156 shares at
September 30, 1999.......................... (2,375) (2,375) (2,375)
-------- -------- --------
Total shareholders' equity.................. 128,182 128,182 158,707
-------- -------- --------
Total capitalization...................... $191,577 $376,030 $382,030
======== ======== ========
</TABLE>
- ------------------
(1) In connection with our five-for-four stock split declared on February 1,
1999, we filed a Certificate of Stock Split in March 1999 to increase the
authorized shares of our common stock to 31,250,000.
This table does not reflect:
. 137,500 shares of common stock issuable upon exercise of outstanding
warrants to purchase our common stock exercisable at $10.327 per share;
. 171,880 shares issuable upon exercise of outstanding warrants to purchase
our common stock exercisable at $15.818 per share;
. 544,689 shares reserved for issuance upon the exercise of outstanding
stock options under our stock option plans; or
. up to 300,000 shares that may be sold to the underwriters upon exercise of
their over-allotment option.
S-18
<PAGE>
Common Stock Price Range and Dividend Policy
Our common stock began trading August 9, 1996 on the American Stock Exchange
under the symbol "MRS." The following table sets forth the high and low sales
prices for our common stock for the period from January 1, 1997 to December 2,
1999.
All prices and dividends per share below and included elsewhere in this
prospectus have been adjusted to reflect the 10% stock dividend declared on
February 3, 1998 and paid on March 2, 1998 to stockholders of record on
February 13, 1998, as well as the five-for-four stock split declared on
February 1, 1999, and paid on March 1, 1999, to stockholders of record on
February 11, 1999.
<TABLE>
<CAPTION>
Price Range Dividends
------------- Paid
High Low Per Share
------ ------ ---------
<S> <C> <C> <C>
1997:
First Quarter....................................... $12.72 $ 7.45 $.058
Second Quarter...................................... 12.64 9.91 .058
Third Quarter....................................... 16.50 11.64 .058
Fourth Quarter...................................... 20.36 14.19 .058
1998:
First Quarter....................................... $19.00 $14.72 $.058
Second Quarter...................................... 18.70 15.09 .064
Third Quarter....................................... 18.95 13.30 .064
Fourth Quarter...................................... 17.41 13.41 .064
1999:
First Quarter....................................... $18.70 $15.50 $.064
Second Quarter...................................... 17.63 15.00 .070
Third Quarter....................................... 21.00 16.00 .070
Fourth Quarter (through December 8, 1999)........... 20.31 15.88 .070
</TABLE>
- ------------------
On December 8, 1999, the closing price for our common stock, as reported by the
AMEX, was $16.0625 per share. As of December 2, 1999, there were 321 holders of
record of our common stock.
Holders of our common stock are entitled to receive cash dividends out of the
funds we have legally available for that purpose. This entitlement is subject
to the qualification that our board need not declare or pay dividends if to do
so would be in violation of any laws or restrictions under contractual
arrangements (including credit agreements) to which we are or may hereafter
become a party.
On February 3, 1998, the board declared a 10% stock dividend to be paid March
2, 1998 to stockholders of record at the close of business on February 13,
1998. No fractional shares were issued and stockholders entitled to a
fractional share received a cash payment equal to the market value of the
fractional share at the close of the market on the stock dividend record date.
On February 1, 1999, the board declared a five-for-four stock split to be paid
March 1, 1999 to stockholders of record at the close of business on February
11, 1999. No fractional shares were issued, and stockholders entitled to a
fractional share received a cash payment equal to the market value of the
fractional share at the close of the market on the stock split record date.
S-19
<PAGE>
Unaudited Pro Forma Combined Financial Statements
The following unaudited pro forma combined statements of operations of Midcoast
for the nine months ended September 30, 1999 and the year ended December 31,
1998 and the unaudited pro forma combined balance sheet of Midcoast as of
September 30, 1999 give effect to the acquisition of the KPC under the purchase
method of accounting along with the associated bank debt financing.
The unaudited pro forma combined financial statements are based upon the
historical financial statements of Midcoast and the historical combined
financial statements of KPC. The unaudited pro forma combined balance sheet as
of September 30, 1999 includes the purchase accounting entries made for KPC and
was prepared assuming that the acquisition was consummated as of September 30,
1999. The unaudited pro forma combined statements of operations for the nine
months ended September 30, 1999 and the year ended December 31, 1998 are
presented as if the KPC acquisition occurred on January 1, 1998. Because of the
seasonal nature of the operations of KPC, among other factors, the results of
the interim periods presented are not necessarily indicative of the results to
be expected of an entire year.
The pro forma adjustments and the resulting unaudited pro forma combined
financial statements have been prepared based upon available information and
certain assumptions and estimates deemed appropriate by Midcoast. A final
determination of required purchase accounting adjustments and the allocation of
the purchase price to the assets acquired and liabilities assumed based on
their respective fair values has not yet been made for KPC. Accordingly, the
purchase accounting adjustments for KPC reflected in the pro forma financial
statements are preliminary and have been made solely for purposes of developing
such information.
Midcoast's management believes that the pro forma adjustments and underlying
assumptions and estimates reasonably present the significant effects of the
transactions reflected thereby and that any subsequent changes in the
underlying assumptions and estimates will not materially affect the unaudited
pro forma combined financial statements presented herein. The unaudited pro
forma combined financial statements do not purport to represent what Midcoast's
financial position or results of operations actually would have been had the
KPC acquisition occurred on the dates indicated or to project the Midcoast's
financial position or results of operations for any future date or period.
S-20
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------ -------------------------
Combined
Midcoast KPC Adjustments Operations
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...... $ 1,468 $ 14,165 $ (14,165)(a) $ 1,468
Accounts receivable, net of
allowance of $104 and $0,
respectively.................. 48,597 6,357 -- 54,954
Materials and supplies and
other......................... 1,425 477 -- 1,902
-------- -------- --------- --------
Total current assets.......... 51,490 20,999 (14,165) 58,324
-------- -------- --------- --------
PROPERTY, PLANT AND EQUIPMENT, at
cost
Natural gas transmission
facilities.................... 192,041 92,427 119,986 (a) 404,454
Investment in transmission
facilities.................... 1,358 -- -- 1,358
Natural gas processing
facilities.................... 11,115 -- -- 11,115
Oil and gas properties, using
full-cost method of
accounting.................... 1,383 -- -- 1,383
Other property and equipment... 6,329 -- -- 6,329
-------- -------- --------- --------
212,226 92,427 119,986 424,639
ACCUMULATED DEPRECIATION,
DEPLETION AND AMORTIZATION...... (10,578) (29,789) -- (40,367)
-------- -------- --------- --------
201,648 62,638 119,986 384,272
OTHER ASSETS, net of
amortization.................... 1,946 13,497 1,204 (a) 16,647
-------- -------- --------- --------
TOTAL ASSETS.................. $255,084 $ 97,134 $ 107,025 $459,243
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
liabilities................... $ 39,434 $ 3,895 $ -- $ 43,329
Current portion of long-term
debt payable to banks......... 176 4,260 (4,260)(c) 176
Short-term borrowing from
banks......................... 10,243 6,000 (6,000)(c) 10,243
Other current liabilities...... 27 1,971 10,750 (d) 12,748
-------- -------- --------- --------
Total current liabilities..... 49,880 16,126 490 66,496
-------- -------- --------- --------
LONG TERM DEBT PAYABLE TO BANKS.. 63,395 58,127 126,326 (c) 247,848
OTHER LIABILITIES................ 2,078 3,090 -- 5,168
DEFERRED INCOME TAXES............ 11,029 -- -- 11,029
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES.................... 520 157 (157)(h) 520
COMMITMENTS AND CONTINGENCIES.... -- -- -- --
SHAREHOLDERS' EQUITY
Common stock, par value $.01
per share; authorized
31,250,000 shares; issued
10,721,980 shares............. 107 -- -- 107
Paid in capital................ 135,544 19,634 (19,634)(b) 135,544
Accumulated (deficit)
earnings...................... (5,094) -- -- (5,094)
Less: Cost of 161,156 treasury
shares........................ (2,375) -- -- (2,375)
-------- -------- --------- --------
Total shareholders' equity.... 128,182 19,634 (19,634) 128,182
-------- -------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY......... $255,084 $ 97,134 $ 107,025 $459,243
======== ======== ========= ========
</TABLE>
See notes to unaudited pro forma combined financial statements.
S-21
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------ ------------------------
Combined
Midcoast KPC Adjustments Operations
--------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenue................. $ 267,365 $32,044 $ -- $ 299,409
Operating Expenses
Costs of Natural Gas and
Transportation Charges......... 233,782 8,618 -- 242,400
Natural Gas Processing Costs.... 8,924 -- -- 8,924
Other Operating, Maintenance and
G&A Expense.................... 5,936 10,927 (1,466)(e) 15,397
Taxes Other than Income Taxes... -- 1,110 -- 1,110
Depreciation and Amortization... 4,793 3,523 1,907 (f) 10,223
--------- ------- ------- ---------
Total Operating Expense....... 253,435 24,178 441 278,054
--------- ------- ------- ---------
Operating Income.................. 13,930 7,866 (441) 21,355
Interest Expense, Net............. (3,651) (4,299) (6,278)(g) (14,228)
Minority Interest................. (28) (8) 8 (h) (28)
Other Income (Expense)............ (115) 50 -- (65)
--------- ------- ------- ---------
Income before Tax................. 10,136 3,609 (6,711) 7,034
Federal and State Income Tax...... 1,547 -- (1,241)(i) 306
--------- ------- ------- ---------
Net Income........................ $ 8,589 $ 3,609 $(5,470) $ 6,728
========= ======= ======= =========
Earnings Per Share
Basic........................... $ 1.00 $ 0.78
========= =========
Diluted......................... $ 0.98 $ 0.76
========= =========
Weighted Average Number of Shares
Outstanding
Basic........................... 8,585,037 8,585,037
========= =========
Diluted......................... 8,804,258 8,804,258
========= =========
</TABLE>
See notes to unaudited pro forma combined financial statements.
S-22
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------ ------------------------
Combined
Midcoast KPC Adjustments Operations
--------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenue................. $ 234,069 $54,146 $ -- $ 288,215
Operating Expenses
Costs of Natural Gas and
Transportation Charges......... 206,950 22,174 -- 229,124
Natural Gas Processing Costs.... 4,052 -- -- 4,052
Other Operating, Maintenance and
G&A Expense.................... 6,317 10,815 (1,955)(e) 15,177
Taxes Other than Income Taxes... -- 1,478 -- 1,478
Depreciation and Amortization... 3,197 4,243 2,543 (f) 9,983
--------- ------- ------- ---------
Total Operating Expense....... 220,516 38,710 588 259,814
--------- ------- ------- ---------
Operating Income.................. 13,553 15,436 (588) 28,401
Interest Expense, Net............. (3,247) (6,011) (8,006)(g) (17,264)
Minority Interest................. (58) (16) 16 (h) (58)
Other Income (Expense)............ 174 64 -- 238
--------- ------- ------- ---------
Income before Tax................. 10,422 9,473 (8,578) 11,317
Federal and State Income Tax...... 1,309 -- 358 (i) 1,667
--------- ------- ------- ---------
Net Income........................ $ 9,113 $ 9,473 $(8,936) $ 9,650
========= ======= ======= =========
Earnings Per Share
Basic........................... $ 1.29 $ 1.36
========= =========
Diluted......................... $ 1.25 $ 1.32
========= =========
Weighted Average Number of Shares
Outstanding
Basic........................... 7,074,372 7,074,372
========= =========
Diluted......................... 7,298,345 7,298,345
========= =========
</TABLE>
See notes to unaudited pro forma combined financial statements.
S-23
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(in thousands)
(a) Reflects the preliminary allocation of the total purchase price in excess
of the net assets acquired to estimated fair value of property, plant and
equipment utilizing the purchase method of accounting for the transaction
as of September 30, 1999.
The excess purchase price is calculated as follows:
<TABLE>
<S> <C>
Cash paid to KPC................................................ $112,695
Accrued interest on senior notes and other indebtedness......... 2,167
Debt issuance costs............................................. 1,204
--------
Total cash cost................................................. $116,066
Plus: accrual of termination fee................................ 10,750
Less: net assets of KPC (net of $14,165 related to cash not
acquired)...................................................... (5,626)
--------
Excess of purchase price over net assets acquired............... $121,190
Excess purchase price is allocated as follows:
Property, plant and equipment................................. $119,986
Debt issuance costs........................................... 1,204
--------
$121,190
========
</TABLE>
(b) Represents the elimination of the paid in capital of KPC.
(c) Reflects incremental borrowings totaling $126,326 calculated as follows:
<TABLE>
<S> <C>
Cash cost (as discussed in (a) above)............................. $116,066
Refinancing of short term borrowings from banks................... 6,000
Refinancing of current portion of long term debt.................. 4,260
--------
Total............................................................. $126,326
========
</TABLE>
At closing, Midcoast repaid the senior secured notes of KPC and incurred a
prepayment penalty of $8,747 which will be reflected as an extraordinary
charge in the fourth quarter of 1999.
(d) Reflects current liability related to termination fee on the Project
Development and MRG Interests Agreement negotiated in connection with the
acquisition of KPC.
(e) To reduce general and administrative expenses for the costs related to
certain senior management involuntarily terminated in connection with the
transaction. Midcoast's management has made explicit determinations of
salary, benefit and other cost reductions resulting from these
terminations. Such reductions will have a continuing impact on expenses in
future periods. None of the identified terminations or cost reductions will
reduce revenues or efficiency of operations.
(f) Represents additional depreciation and amortization expense based on (1)
the depreciation expense calculated on a straight-line basis related to the
allocation of the excess purchase price to the depreciable assets of KPC
using a remaining useful life of 43 years and (2) the deferred financing
costs associated with the new credit agreement amortized over a five year
period offset by depreciation expense related to leasehold improvements and
furniture which were not acquired in the transaction.
(g) Reflects incremental interest expense on new debt associated with the
acquisition at a rate of the current three-month LIBOR plus the applicable
margin being charged to Midcoast (8.11%).
(h) Represents the elimination of the General Partner's Interest.
(i) Represents the tax expense incurred on KPC's income plus the tax effect of
the pro forma adjustments computed using a 40% statutory rate (34% federal
plus 6% state).
S-24
<PAGE>
Business and Properties
We are a rapidly growing pipeline company engaged in the transportation,
gathering, processing and marketing of natural gas and other petroleum
products. We currently own and operate over 3,800 miles of pipeline, including
interstate and intrastate transmission pipelines, end-user pipelines and
gathering systems, with an aggregate daily throughput capacity of approximately
3.0 Bcf per day. In addition, we have four processing and treating plants with
an aggregate throughput capacity of approximately 100 MMcf per day. Our
principal assets are located in Alabama, Kansas, Louisiana, Mississippi,
Missouri, Oklahoma, Texas and Canada. In November 1999, we purchased KPC for
$195.2 million. KPC owns and operates an 1,120 mile regulated natural gas
pipeline system that transports natural gas from Oklahoma and western Kansas to
markets in and surrounding Kansas City.
Since 1996, we have grown significantly by acquiring or constructing 71
pipeline systems at an aggregate cost of $362.5 million. As a result of our
growth, our average daily volumes, on a pro forma basis, increased to
approximately 996 MMcf per day for the nine months ended September 30, 1999
from approximately 117 MMcf per day in 1996. In addition, our EBITDA and net
income increased to $16.9 million and $9.1 million, respectively, in 1998 from
$3.1 million and $1.9 million, respectively, in 1996. For the nine months ended
September 30, 1999, our pro forma EBITDA was $31.5 million and pro forma net
income was $6.7 million.
We segregate our business activities into three principal segments:
Transmission Pipelines; End-User Pipelines; and Gathering Pipelines and Natural
Gas Processing. Our management analyzes these segments independently. The
segments derive revenue from different sources. Set forth below is a
description of the principal business activities conducted by each of the
segments.
. Transmission Pipelines. We own and operate one intrastate and three
interstate transmission pipelines. These systems primarily receive and
deliver natural gas to and from other pipelines and also may serve end-
user or gathering functions. We receive transportation fees for
transporting gas owned by other parties through our pipeline systems. We
seek to further expand our activities in this area through the acquisition
or construction of natural gas transmission pipelines in our core
geographic areas of operation where operational synergies and market
opportunities exist or in new geographic regions where there is increasing
demand for gas by municipal and industrial users. Our primary transmission
systems are the MIT system, located principally in northern Alabama along
the Tennessee River Valley, the Midla system, located in Louisiana and
Mississippi, and the KPC system located in Kansas, Missouri and Oklahoma.
Our average daily transmission pipeline volumes increased 1,186% to 450
MMcf per day for the pro forma nine months ended September 30, 1999 from
35 MMcf per day in 1996. Our Transmission Pipelines segment accounted for
$13.2 million or 58% of our gross margin in 1998 and $29.0 million or 69%
of our pro forma gross margin for the nine months ended September 30,
1999.
. End-User Pipelines. We also contract with industrial end-users,
municipalities and electrical generating facilities to provide natural gas
and natural gas transportation services to their facilities through
interconnect gas pipelines that we construct or acquire. We currently own
and operate 35 of these end-user systems. These pipelines provide a direct
supply of natural gas to new industrial facilities or to existing
facilities as an alternative to the LDCs. We intend to continue to pursue
direct sales to these end-users, which now have the flexibility to
negotiate their gas purchase and transportation contracts as a result of
industry deregulation. Frequently, we are able to offer our end-user
customers rates lower than the customer's current energy supplier. Our
contracts with end-user customers typically provide that the customer pay
a transportation fee based on the volume of natural gas transported
through our pipeline. Some of our end-user customers include Amoco
Chemical Company, Champion International Corporation, Chevron Chemical
Company, Exxon Chemical Company, Georgia Pacific Corporation and Owens
Corning Corporation. Our average daily end-user volumes increased 456% to
189 MMcf per day for the pro forma nine months ended September 30, 1999
from 34 MMcf per day in 1996. Our End-User Pipelines segment accounted for
$5.0 million or 22% of our gross margin in 1998 and $5.7 million or 14% of
our pro forma gross margin for the nine months ended September 30, 1999.
S-25
<PAGE>
. Gathering Pipelines and Natural Gas Processing. Our 41 gathering systems
typically consist of a network of pipelines that collect natural gas or
crude oil from points near producing wells and transport it to larger
pipeline systems for further transmission. Gathering systems may include
meters, separators, dehydration facilities and other treating equipment
owned by us or others. We derive revenues from gathering systems by
transporting natural gas or crude oil owned by others through our
pipelines for a transportation fee, by purchasing natural gas and
utilizing our pipelines to transport the natural gas to a customer in
another location where the natural gas is resold or, in certain instances,
by purchasing natural gas and arranging for the delivery and resale of an
equivalent quantity of natural gas to a customer not directly served by
our pipelines. We typically accomplish transactions with customers not
directly served by our pipelines by entering into agreements whereby we
exchange natural gas in our pipelines for natural gas in the pipelines of
other transmission companies. We intend to pursue the acquisition or
construction of additional gas gathering systems in or near our core
geographic operating areas and where drilling activity is expected to
provide opportunities for the expansion of gathering or processing
facilities. Our more significant gathering and processing assets, which
were acquired in 1998 and 1999, include our Anadarko/Mendota system in the
Texas Panhandle and western Oklahoma, the Calmar system in Alberta,
Canada, and Dufour Petroleum, Inc. an NGL, crude oil and CO\\2\\ trucking
and marketing company. Our average daily gathering and processing volumes
increased 644% to 357 MMcf per day for the pro forma nine months ended
September 30, 1999 from 48 MMcf per day in 1996. Our Gathering Pipelines
and Natural Gas Processing segment accounted for $4.4 million or 19% of
our gross margin in 1998 and $7.4 million or 17% of our pro forma gross
margin for the nine months ended September 30, 1999.
We realize our natural gas processing revenues from the extraction and sale
of NGLs as well as the sale of the residual natural gas. We earn these
revenues under processing contracts with producers of natural gas utilizing
both a "percentage of proceeds" and "keep-whole" basis. The contracts based
on "percentage of proceeds" provide that we receive a percentage of the NGLs
and residual gas revenues as a fee for processing the producer's gas. The
"keep-whole" contracts require that we reimburse the producers for the Btu
energy equivalent of the NGLs and fuel we remove from the natural gas as a
result of processing, and we retain all revenues from the sale of the NGLs.
Once extracted, the NGLs are further separated in our facilities into
products such as ethane, propane, butanes, natural gasoline and condensate.
These products are then sold to various wholesalers along with raw sulfur
from our sulfur recovery plant. Our processing margins can be adversely
affected by declines in NGL prices, declines in gas throughput, or increases
in shrinkage or fuel costs, and in the case of "keep-whole" contracts,
margins can be affected by rising natural gas prices. As of November 30,
1999, we owned four large capacity processing and/or treating plants and over
20 smaller portable processing plants.
Gas Marketing Services. In addition, we provide natural gas marketing services
to our customers within each of the three segments. We have focused our gas
marketing activities on our systems with a strategic focus on providing quality
and consistent service to customers connected to our pipeline network. Our
marketing activities include providing natural gas supply and sales services to
some of our end-user customers by purchasing the natural gas supply from other
marketers or pipeline affiliates and reselling the natural gas to the end-user.
We also purchase natural gas directly from well operators on many of our
gathering systems and resell the natural gas to other marketers or pipeline
affiliates. Many of the contracts pertaining to our gas marketing activities
are month-to-month, spot market transactions with numerous gas suppliers or
producers in the industry. We also offer other gas services to some of our
customers including management of capacity release and gas balancing.
Typically, we purchase natural gas at a price determined by prevailing market
conditions. Simultaneously with our purchase of natural gas, we generally
resell natural gas at a higher price under a sales contract that is comparable
in terms to our purchase contract, including any price escalation provisions.
In most instances, small margins are characteristic of natural gas marketing
because there are numerous companies of greatly varying size and financial
capacity who compete with us in the marketing of natural gas. The profitability
of our natural gas marketing operations depends in large part on the ability of
our management to assess and respond to changing market conditions in
negotiating these natural gas purchase and sale agreements. As a
S-26
<PAGE>
consequence of the increase in competition in the industry and volatility of
natural gas prices, end-users have been reluctant to enter into long-term
purchase contracts. The inability of management to respond appropriately in
changing market conditions could have a negative effect on our profitability.
Accordingly, historical operating income associated with this revenue stream
has varied depending on market conditions. The use of third-party pipelines in
our gas marketing activities also exposes us to economic risk. This risk
results from imbalances or nominated volume discrepancies, which can result
either in penalties having a negative impact on earnings or in a transaction
gain, depending on how and when imbalances are corrected. We believe the
marketing of natural gas is an important complement to our transportation
services.
We derive revenue from transportation fees for transporting natural gas and
petroleum liquids through our pipelines. In addition, we provide natural gas
marketing services to our customers within each of the three segments. Although
the majority of our business is transportation-fee based, we do retain some
exposure to commodity prices in our natural gas processing business. This
exposure represents a relatively small proportion of our total gross margin but
provides us with modest upside potential if NGL spreads remain high compared to
recent historical lows.
Opportunities in Our Industry
The natural gas industry has undergone dramatic change over the past decade
largely due to a series of steps taken by the federal and state governments to
deregulate the industry and increase competition among industry participants.
These actions are causing a major restructuring of the relationships between
interstate pipeline companies, LDCs and their respective customers and have
created opportunities for us to compete for these customers. We believe the
strategic location of our pipelines, our strong industry relationships and
lower cost structure relative to major interstate carriers and LDCs position us
well to continue to take advantage of this opportunity to expand our customer
base.
As the focus of deregulation has shifted to the electric generating industry,
there has been an increasing convergence of the natural gas and electric
industries. There is also a general trend toward the consolidation of companies
within the natural gas industry. These changes have prompted several large
mergers between and among electric utilities and diversified natural gas
companies. Frequently, these combined companies will divest certain of their
natural gas transmission, gathering and processing assets either as a result of
antitrust divestiture requirements or for strategic purposes. As a result, we
believe that these divestitures create considerable acquisition opportunities
for us and that our industry relationships position us well to capitalize on
these opportunities.
Business Strategy
Our principal business strategy is to increase our earnings and cash flow by
focusing on accretive acquisitions, pursuing pipeline system and processing
facility construction and expansion opportunities and improving the
profitability of these systems through volume growth initiatives and cost
savings opportunities. We implement this strategy through the following steps:
. Accretive Acquisitions. We seek to acquire natural gas or petroleum
liquids transmission, end-user and gathering pipeline systems and
processing plants that offer the opportunity for operational synergies and
the potential for increased utilization and expansion of the system. We
target systems in our core geographic areas of operation in order to
capitalize on existing infrastructure, personnel and customer
relationships to maximize system profitability. We also seek to acquire
assets in other areas with growing demand for natural gas or increasing
drilling activity. These acquisitions enable us to establish new core
areas in which to build a regional presence. For example, we purchased the
Anadarko gas gathering system located in Texas and Oklahoma in September
1998. The 696-mile system and processing plant are located in a prolific
natural gas producing region and established a new core geographic area
for us. We
S-27
<PAGE>
quickly strengthened our position in this area in December 1998 with the
acquisition of the 35-mile Mendota system. This system, which included
another processing facility, was interconnected with the Anadarko system,
providing access to additional areas of natural gas production.
. Construction and Expansion Opportunities. We leverage our existing
infrastructure and customer relationships by constructing systems to meet
new or increased demand for pipeline transportation services. These
projects include expansion of existing systems and construction of new
pipeline or processing facilities. For example, earlier this year we
constructed new facilities near the southern end of the Midla system to
provide approximately 55 MMcf per day of high pressure natural gas to two
industrial customers. In November 1999, we agreed to construct additional
facilities for one of these customers to supply up to 80 MMcf per day of
natural gas to their natural gas processing plants near Baton Rouge.
. Improving Existing System Profitability. After a system is acquired or
constructed, we begin an aggressive effort to market directly to both
producers and end-users in order to fully utilize the system's capacity.
As part of this process, we focus on providing quality service to our
existing customers while identifying new customers. Many of our existing
pipeline and processing systems were designed with excess throughput
capacity that provides us with opportunities to increase throughput with
little incremental cost and to facilitate higher margin "swing" sales
during periods of increased gas demand. For example, following the
purchase of the MIT system in May 1997, we had increased firm
transportation volumes 29% to 170 MMcf per day by the Spring of 1999 from
132 MMcf per day with minimal additional capital outlays. In addition, we
generally seek to achieve administrative and operational efficiencies by
capitalizing on the geographic proximity of many of our systems.
Acquisition and Construction Activity
From January 1, 1996 through November 30, 1999, we have acquired ownership of
or interests in or constructed 71 pipelines, including four natural gas
processing plants, for an aggregate cost of $362.5 million. The following table
summarizes certain information regarding our acquisition and construction
activities:
<TABLE>
<CAPTION>
1996 1997 1998 1999 Total
(11 mos.)
---- ----- ----- --------- ------
<S> <C> <C> <C> <C> <C>
Acquisition Expenditures (in millions)....... $8.4 $70.3 $52.1 $231.7 $362.5
Pipelines Acquired or Constructed:
Transmission Pipelines...................... -- 2 -- 1 3
End-User Pipelines.......................... 6 6 1 15 28
Gathering Pipelines......................... 17 3 5 15 40
---- ----- ----- ------ ------
Total Number................................ 23 11 6 31 71
==== ===== ===== ====== ======
Total Miles................................. 402 907 854 1,518 3,681
Processing and Treating Facilities
Acquired.................................... 1 -- 2 1 4
</TABLE>
1999 Acquisitions. During 1999, we have consummated $231.7 million in
acquisitions as follows:
Kansas Pipeline Company Acquisition. We acquired KPC and other related
entities in November 1999 for $195.2 million. KPC owns and operates an
1,120 mile regulated interstate natural gas pipeline system. The system
extends into two major segments from northwestern and northeastern Oklahoma
through Wichita into the Kansas City metropolitan area. The system's two
principal customers are divisions of ONEOK, Inc. and Southern Union
Company, which are the local distribution companies for Wichita and Kansas
City. KPC derives 97% of its gross margin from a series of long-term
transportation contracts with these two principal customers. KPC is capable
of delivering approximately 140 MMcf per day and 21 MMcf per day of natural
gas into the Kansas City and Wichita marketplaces, respectively.
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<PAGE>
Revenues on the KPC system were $54.1 million in 1998 and $32.0 million for
the nine months ended September 30, 1999, and EBITDA was $19.7 million in
1998 and $11.4 million for the nine months ended September 30, 1999.
The addition of KPC to our other Mid-continent pipeline assets establishes
a new strategic core area for us. We have identified several operational
enhancements and market opportunities at KPC that may result in immediate
cash flow improvement:
. We will provide the senior general and administrative functions for
KPC. As a result, we expect to reduce general and administrative costs
at KPC by approximately $2.0 million per year.
. We believe opportunities exist to integrate natural gas supply from our
Anadarko system with the transportation and distribution assets of the
KPC system in order to increase overall margins in our mid-continent
operating area.
. Prior to the KPC acquisition, we provided natural gas to an Owens
Corning plant, the Kansas City Board of Public Utilities, and the City
of Augusta Power Plant via interconnections from a major pipeline
system owned by one of our competitors. Now that we own the KPC system,
we may serve these customers directly through interconnections to our
KPC system. Further, we will have more access to natural gas supply to
pursue similar opportunities.
. The Kansas City area is experiencing industrial, municipal and other
end-user demand growth. The KPC system is one of three systems serving
the Kansas City market. We believe we have the opportunity to
capitalize on natural gas demand growth in the area.
KPC is a party to an agreement with Management Resources Group, LLC
pursuant to which the parties will cooperate with each other on projects in
the vicinity of the KPC system and Management Resources will receive from
KPC monthly contingent payments in the amount of 50% of KPC's gross revenue
in excess of certain agreed to monthly and yearly amounts. KPC has the
option to terminate this agreement by paying Management Resources
approximately $10.8 million in cash or publicly tradable securities on or
before January 31, 2000 in which case the agreement shall be null and void,
or by paying $50.0 million in cash after such date, at which time the
agreement will be canceled.
In connection with the KPC acquisition an $8.7 million make-whole premium
associated with the early retirement of certain debt of KPC will be as
recorded as a pre-tax charge in the fourth quarter of 1999.
Calmar Acquisition. We purchased the Calmar system in Alberta, Canada from
Probe Exploration, Inc. ("Probe"). The total value of the transaction was
approximately US $13.2 million. The assets purchased include a 30 MMcf per
day amine sweetening plant, 30 miles of gas gathering pipeline and
approximately 4,000 horsepower of compression located near Edmonton,
Alberta. The Calmar system currently gathers and treats sour gas from
producing wells operated by Probe and Courage Energy Inc. In conjunction
with the purchase, Probe entered into a gas gathering and treating
agreement with us, including the long-term dedication of Probe's reserves
in the Leduc Field, a right of first refusal agreement on new or existing
midstream assets within a defined 390-square mile area of interest, and an
assignment to us of an existing third party gathering and treating
agreement.
DPI and Flare Acquisitions. We purchased two related companies, Flare,
L.L.C. and DPI. The total value of the transaction was approximately $11.1
million and could include future consideration should certain contingencies
be met. The Flare and DPI shareholders received cash consideration of
approximately $3.2 million, we assumed $5.5 million in debt, and the DPI
shareholders received 163,719 shares of our common stock. Flare is a
natural gas processing and treating company whose principal assets include
27 portable natural gas processing and treating plants from which it earns
revenues based on treating and processing fees and/or a percentage of the
NGLs produced. DPI is an NGL, crude oil and CO\\2\\ transportation and
marketing company. DPI operates 43 NGL and crude oil trucks and trailers, a
fleet of 40 pressurized railcars and in excess of 400,000 gallons of NGL
storage facilities and product treating and handling equipment.
S-29
<PAGE>
Gloria System Acquisition. In December 1998, we entered into an agreement with
Koch Industries to purchase the Gloria system in southeastern Louisiana for a
total price of approximately $6.0 million. The Gloria system is comprised of
approximately 133 miles of pipeline with a 1,650 horsepower compressor station,
and includes 51 miles of gathering pipeline and 82 miles of transmission
pipeline. The system gathers gas from seven producing fields and also directly
supplies natural gas to an industrial customer and an LDC in the area. The
pipeline was part of Koch's interstate system and FERC approval for the
system's abandonment from interstate service was received in October of 1999,
which, following the expiration of the required notice period, enabled us to
proceed to close the Gloria system acquisition. The purchase of the Gloria
system is anticipated to close in December 1999.
Anadarko/Mendota Acquisitions. In September 1998, we purchased the Anadarko gas
gathering system from a subsidiary of El Paso Energy Corporation. The pipeline
system was purchased for cash consideration of approximately $35.0 million.
Under the agreement, we acquired ownership and operation of the Anadarko gas
gathering system located in Beckham and Roger Mills Counties in Oklahoma, and
Hemphill, Roberts and Wheeler Counties in Texas. The system is comprised of
over 696 miles of pipeline and gathers gas from approximately 250 wells and
includes a 40 MMcf per day natural gas processing facility, 11 compressor
stations with a total of over 14,000 horsepower and interconnections with eight
major interstate and intrastate pipeline systems.
We expanded the Anadarko system in December 1998 with the acquisition of the
Mendota system from Seagull Energy Corporation for approximately $3.8 million.
The Mendota system, which is interconnected with the Anadarko system, includes
a processing facility and 35 miles of gathering pipeline.
Midla Acquisition. In October 1997, we acquired (i) a 405-mile interstate gas
pipeline that runs from the Monroe gas field in northern Louisiana, southward
through Mississippi to Baton Rouge, Louisiana, (ii) three end-user gas
pipelines with a collective length of 40 miles, (iii) two offshore lateral gas
pipelines with a collective length of approximately nine miles. These pipelines
serve a number of large industrial and municipal customers, and (iv) a natural
gas marketing company that was subsequently merged into Midcoast Marketing
Inc., our natural gas marketing affiliate.
MIT Acquisition. In May 1997, we acquired (i) a 295-mile interstate
transmission pipeline located in northern Alabama, Mississippi and southern
Tennessee that transports natural gas to industrial and municipal customers,
(ii) the 38-mile Champion system and the one-mile Monsanto system pipeline in
northern Alabama which primarily serve these two large industrial customers and
(iii) a natural gas marketing company that was subsequently merged into
Midcoast Marketing Inc.
S-30
<PAGE>
Pipeline Systems
As of November 30, 1999, we owned an interest in and operated 80 pipelines.
These include three interstate transmission pipelines, one intrastate
transmission pipeline, 35 end-user pipelines and 41 gathering pipelines. The
majority of these pipelines are situated strategically in our core Gulf Coast
and Mid-continent operating areas. Certain information concerning our pipelines
is summarized in the following table:
<TABLE>
<CAPTION>
Average Daily Daily Volume
Volume(2) Capacity(2)
Length (MMbtu (MMbtu
Pipeline System(1) Location (in Miles) per Day) per Day)
------------------ -------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
TRANSMISSION PIPELINES:
Magnolia............... Central AL 111.0 28,447 120,000
MIT.................... Selmer, TN to Huntsville, AL 295.3 101,884 200,000
Midla.................. Monroe, LA to Baton Rouge, LA 404.6 78,092 190,000
KPC.................... OK, KS, and MO 1,120.0 N/A(8) 160,000
------- ------- ---------
Total Transmission
(4 systems).......... 1,930.9 208,423 670,000
END-USER PIPELINES:
Creole................. Orleans Parish, LA 44.0 32,181 115,000
Farmlands.............. Grant Parish, LA 4.3 31,434 62,000
Baton Rouge............ E. Baton Rouge Parish, LA 33.2 26,384 80,000
Champion............... Lawrence & Colbert Cos., AL 38.0 23,313 50,000
Westlake............... Calcasieu Parish, LA 1.3 14,209 50,000
Crown Vantage.......... West Feliciana Parish, LA 2.5 8,489 32,800
Salt Creek(3).......... Kent & Scurry Cos., TX 39.1 5,437 20,000
Monsanto............... Morgan Co., AL 1.0 4,432 20,000
OC Kansas.............. Wyandotte CO, KS 1.0 2,817 6,500
Roane County(4)........ Roane CO, TN 2.1 1,440 5,000
All Other (25 systems). LA, KS, NY, TN, TX 41.7 5,975 107,200
------- ------- ---------
Total End-User
(35 systems)......... 208.2 156,111 548,500
GATHERING PIPELINES AND
NATURAL GAS PROCESSING:
Anadarko/Mendota(5).... OK & TX Panhandle 731.0 157,829 345,000
T51.................... Offshore LA 4.7 18,126 72,000
Cook Inlet Oil (4)..... Cook Inlet, AK 2.7 17,141(6) 120,000(6)
T33.................... Offshore LA 3.9 13,898 24,000
Guerra(3).............. Webb & Duval Cos., TX 8.4 6,485 50,000
Loma Novia(3).......... Duval & McMullen Cos., TX 15.2 6,178 25,000
Harmony(5)............. Central MS 155.4 5,328 20,000
Texana(7).............. South TX 46.0 4,488 15,000
Minnie Bock............ Nueces Co., TX 14.0 2,898 10,000
Calmar(5).............. Alberta, Canada 30.0 N/A(8) 30,000
All Other (31 systems). AK, AL, KS, MS, OK, TX 674.1 9,792 1,081,500
------- ------- ---------
Total Gathering
(41 systems)......... 1,685.4 242,163 1,792,500
Total Pipelines
(80 systems)......... 3,824.5 606,697 3,011,000
======= ======= =========
</TABLE>
- ------------------
(1) Unless otherwise indicated, all systems are 100% owned and operated by us.
Inactive systems are not included.
(2) All volume and capacity information is approximate. Average daily volumes
are based on total volumes transported during the twelve-month period ended
December 31, 1998, except for systems that were acquired during 1998. For
these systems the average daily volumes are based on total volumes
transported from the date of acquisition or initial operation through
December 31, 1998.
(3) This system is owned by Pan Grande Pipeline L.L.C., in which we own a 70%
interest and which we operate.
(4) This system is owned and operated by a third-party. We receive throughput
charges from this system.
(5) This gathering system includes natural gas processing and/or treating
facilities.
(6) Volume has been converted from barrels of oil to equivalent Mmbtu of gas
using one barrel to six Mmbtu consistent with industry standards.
(7) This system is owned by Texana Pipeline Company, in which we own a 50%
interest and which we operate.
(8) This system was acquired in 1999; therefore, there were no applicable
volumes for the period shown.
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<PAGE>
Marketing and Competition
Major Customers. Our principal customers are industrial end-users,
municipalities, resellers of natural gas and producers of natural gas. We
typically enter into one- to five-year transportation agreements. These
agreements may also include provisions regarding guaranteed minimum volumes and
price reductions after the customer meets certain transportation commitments.
We also enter into marketing agreements with many of our customers that relate
to gas supply and other services. For our FERC regulated entities, we enter
into firm or interruptible transportation contracts, using the tariff rates
approved by FERC. In certain situations, we have offered discounts from our
tariffs in response to specific market conditions.
The KPC acquisition will result in the addition of two major customers. Kansas
Gas Service, a division of ONEOK, Inc., accounted for 60% of the gross margin
of KPC and will account for 27% of our pro forma gross margin for the nine
months ended September 30, 1999. Also, Missouri Gas Energy, a division of
Southern Union Company, accounted for approximately 37% of the gross margin of
KPC and will account for 16% of our pro forma gross margin for the nine months
ended September 30, 1999. There are no other customers who represent more than
10% of our pro forma gross margin.
Competition. Our business is highly competitive. In marketing natural gas, we
have numerous competitors, including marketing affiliates of interstate
pipelines, major integrated oil companies, and local and national natural gas
gatherers, brokers and marketers of widely varying sizes, financial resources
and experience. Many of these competitors, particularly those affiliated with
major integrated energy and interstate and intrastate pipeline companies, have
financial resources substantially greater than ours. Local utilities and
distributors of natural gas are, in some cases, engaged directly, and through
affiliates, in marketing activities that compete with us. Some of our contracts
are month-to-month arrangements, and, as such, these agreements are affected by
competitive factors at the time of the sale.
We compete against other companies for acquisitions, supplies of natural gas
and customers. In competing for acquisitions, we compete against companies with
greater resources that may be willing to pay more for a given acquisition.
Competition for companies and assets to acquire is primarily based on the
acquiring company's capital resources and its ability to complete the
acquisition in a timely manner. Competition for customers is primarily based on
efficiency, reliability, availability of transportation and the ability to
offer a competitive price for natural gas. Competition for end-users is
primarily based upon reliability and price of deliverable natural gas. For
customers that have the capability to use alternative fuels, such as oil and
coal, we also compete against companies capable of providing these alternative
fuels at a competitive price.
Natural Gas Supply. Our transmission and end-user pipelines have connections
with major interstate and intrastate pipelines that management believes have
access to natural gas volumes in excess of the volumes required for these
systems. However, these purchase contracts may be affected by factors such as
capacity constraints and temporary regional supply shortages beyond both our
and the gas suppliers' control. With regard to our gathering systems, supply
risks include third parties' control of the drilling of new wells, the
inability of wells to deliver gas at required pipeline quality and pressure,
and the depletion of reserves. Our future performance will depend, to a great
extent, on the throughput levels we achieve with respect to our existing
pipelines and the pipelines we acquire or construct in the future. In order to
maintain the throughput on our gathering systems at current levels, we must
access new natural gas supplies to offset the natural decline in reserves. In
connection with the construction and acquisition of our gathering systems, we
made evaluations of well and reservoir data furnished by producers to determine
the availability of natural gas supply for the systems. Based on those
evaluations, management believes that there should be adequate natural gas
supply for us to recoup our investment with an adequate rate of return.
However, management does not routinely obtain independent evaluation of
reserves dedicated to our systems because of the cost of such evaluations.
Accordingly, we do not have estimates of total reserves dedicated to our
systems or the anticipated life of such producing reserves.
S-32
<PAGE>
Regulatory Matters
Rate and Regulatory Matters. Various aspects of the transportation of natural
gas are subject to or affected by extensive federal regulation under the
Natural Gas Act ("NGA") and the Natural Gas Policy Act of 1978 ("NGPA"), as
well as various regulations promulgated by the FERC.
Interstate Pipeline Regulation. Our operations of the MIT, Midla and the KPC
systems constitute the operations of a "natural gas company," as defined in the
NGA. As such, these operations are subject to the jurisdiction of the FERC. The
interstate pipeline operations of these systems are operated pursuant to
certificates of public convenience and necessity and other authorizations
issued under the NGA and pursuant to the NGPA. The FERC regulates the
interstate transportation of and certain sales of natural gas, including, among
other things, rates and charges allowed natural gas companies, extensions and
abandonment of facilities and service, rates of depreciation and amortization
and certain accounting methods.
Pipeline rates for the MIT, Midla and the KPC systems must be filed with and
approved by the FERC. They are regulated by the FERC on a cost-of-service basis
and must be deemed by the FERC to be "just and reasonable." The FERC may
suspend for up to five months the effectiveness of rate changes filed by the
pipeline, and/or permit a changed rate to go into effect subject to refund. The
FERC may require the pipeline to refund, with interest, all or any portion of
any increased amount collected under subject to refund rates that, in the
FERC's final determination, is found not to be just and reasonable. The FERC
also may investigate, either on its own motion or pursuant to protests by third
parties, the lawfulness of pipeline rates that are on file.
In April 1993, jurisdictional rates for the MIT system were increased from
rates that had been in effect since April 1990. This rate increase was agreed
to in an uncontested settlement with the MIT system's customers that the FERC
approved in December 1993. That agreement was amended in September 1996 to
eliminate the requirement that a new rate case be filed in September 1996 or
any year thereafter. As part of that agreement, rates on the MIT system were
reduced 6% effective September 1996.
In June 1996, a decrease in the jurisdictional rates for the Midla system was
proposed from rates that had been in effect since 1990. This rate decrease was
agreed to in an uncontested settlement with Midla's customers and was certified
to the FERC by the presiding Administrative Law Judge in November 1996.
Accordingly, the FERC approved the settlement by letter order dated March 28,
1997. As part of that agreement, Midla is not required to file a new rate case.
Kansas Pipeline Company Acquisition. The pipeline assets of KPC were held in
three partnerships prior to May 11, 1998. KansOk partnership owned intrastate
pipelines whose rates were regulated by state agencies or the FERC. Kansas
Pipeline partnership owned an intrastate pipeline in Kansas whose rates were
determined by the Kansas Corporation Commission. Riverside Pipeline Company,
L.P., owned interstate assets in Kansas, Oklahoma and Missouri that connected
the assets of the other two partnerships at the state lines of Missouri,
Kansas, or Oklahoma.
Effective May 11, 1998, after more than two years of jurisdictional proceedings
before the FERC, the FERC asserted jurisdiction over the assets of these three
entities, which were combined into a single, FERC-regulated entity, KPC. The
new company's initial rates, by order of FERC, were approximately equal to its
then-existing rates. FERC also ordered the company to file a Section 4 Rate
Case by September 10, 1999.
In accordance with the FERC's order, KPC filed a rate case pursuant to Section
4 of the Natural Gas Act on August 27, 1999 (FERC Docket No. RP99-485-000).
KPC's proposed rates reflect an annual revenue increase when compared to its
initial FERC-approved rates. The rates have been protested by KPC's two
principal customers and by the state public utility commissions that regulate
them. On September 30, 1999, the FERC issued an order which set KPC's proposed
rates for hearing and accepted and suspended the rates to be effective March 1,
2000, subject to possible refund. The Section 4 rate case proceeding will
determine whether the rates proposed by KPC for interstate transportation of
natural gas are just and reasonable, and the extent to
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<PAGE>
which KPC must refund all or any part of the proposed rate increase that it
charges to its customers prior to approval. A procedural schedule in the case
has been adopted by the Presiding Administrative Law Judge. A hearing date is
set for September 26, 2000. The case is now in the discovery phase, and it is
anticipated that settlement discussions will begin in January, 2000.
Intrastate Pipeline Regulation. Our intrastate pipeline operations are
generally not subject to regulation by the FERC, but they are subject to
regulation by various agencies of the states in which we operate. The Magnolia
system is subject to the jurisdiction of the FERC with respect to the
transportation rates under NGPA Section 311. Under NGPA Section 311, an
intrastate pipeline can provide transportation service "on behalf of" any
interstate pipeline or LDC served by an interstate pipeline company without
prior FERC authorization. Specifically, the FERC adopted a so-called
"transport" or "title" standard requiring that for purposes of interstate
transportation under NGPA Section 311, the "on behalf of entity" must either
(1) have physical custody of or (2) hold title to the gas at some point during
the transaction. NGPA Section 311 service must be provided without undue
discrimination or preference and is subject to certain FERC filing and
reporting requirements.
The end-user pipelines and the transmission pipelines not regulated by the FERC
are subject to the regulations of the state agencies of the states in which
they are located. Most states have agencies that possess the authority to
review and authorize transactions, construction, acquisition, abandonment and
interconnection of physical facilities. Some states also have state agencies
that regulate transportation rates and contract pricing to ensure their
reasonableness.
Canadian Pipeline Regulation. One of our subsidiaries, Midcoast Canada
Operating Corporation ("Midcoast Canada"), owns the Calmar system located in
central Alberta, Canada. Construction, operation and reclamation of the Calmar
system are primarily regulated by the Alberta Energy and Utilities Board
("EUB") and Alberta Environmental Protection. Rates for gas processing and
transportation through the Calmar system are presently determined by negotiated
contracts. Pursuant to the Alberta Oil and Gas Conservation Act, R.S.A. 1980,
c. O-5, an application may be made to the EUB for an order declaring the Calmar
system to be a common processor, purchaser and/or carrier. In the event that
(i) the EUB grants such an order (with the approval of the Alberta Lieutenant
Governor in Council) and (ii) an agreement respecting rates and charges cannot
be reached between the applicant and Midcoast Canada, a subsequent application
may then be made to the EUB to set rates and charges for gas processing,
purchase and/or transportation at the Calmar system. The EUB also has the
general authority pursuant to the Oil and Gas Conservation Act and Alberta
Pipeline Act, R.S.C. 1980, c. P-80, to conduct an investigation into matters
and questions involving gas plants and pipelines located within Alberta, such
as the Calmar system.
Gathering Operations Regulation. The NGA exempts gas gathering facilities from
the direct jurisdiction of the FERC. We believe that our gathering facilities
and operations meet the current tests that the FERC uses to grant non-
jurisdictional gathering facility status. Some of the recent cases applying
these tests in a manner favorable to the determination of our non-
jurisdictional status are still subject to rehearing and appeal. In addition,
the FERC's articulation and application of the tests used to distinguish
between jurisdictional pipelines and non-jurisdictional gathering facilities
have varied over time. While we believe the current definitions create non-
jurisdictional status for our gathering facilities, no assurance is available
that such facilities will not, in the future, be classified as regulated
transmission facilities. If such a classification were to occur, the rates,
terms, and conditions of the services rendered by those facilities would become
subject to regulation by the FERC.
No state in which we operate currently regulates gathering fees. Although we
are not aware that any state in which we operate a natural gas gathering system
is likely to begin regulation of our natural gas gathering activities and fees,
new or increased state regulation has been adopted or proposed in other natural
gas producing states, and there can be no assurance that such regulation will
not be proposed or adopted in states where we conduct gathering activities or
that we will not expand into or acquire operations in a state where such
regulations could be imposed.
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<PAGE>
Environmental and Safety Matters. Our activities in connection with the
operation and construction of pipelines and other facilities for transporting,
processing, treating, or storing natural gas and other products are subject to
environmental and safety regulation by numerous federal, state, local and
Canadian authorities. This regulation can include ongoing oversight regulation
as well as requirements for construction or other permits and clearances that
must be granted in connection with new projects or expansions. Regulatory
requirements can increase the cost of planning, designing, initial installation
and operation of such facilities. Sanctions for violation of these requirements
include a variety of civil and criminal enforcement measures, including
assessment of monetary penalties, assessment and remediation requirements and
injunctions as to future compliance. The following is a discussion of certain
environmental and safety concerns that relate to us. It is not intended to
constitute a complete discussion of the various federal, state, local and
Canadian statutes, rules, regulations, or orders to which our operations may be
subject.
In most instances, these regulatory requirements relate to the release of
substances into the environment and include measures to control water and air
pollution. Moreover, we could incur liability under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, or
state counterparts, regardless of our fault, in connection with the disposal or
other releases of hazardous substances, including those arising out of
historical operations conducted by our predecessors. Further, the recent trend
in environmental legislation and regulations is toward stricter standards, and
this trend will likely continue in the future.
Environmental laws and regulations may also require us to acquire a permit
before we may conduct certain activities. Further, these laws and regulations
may limit or prohibit activities on certain lands lying within wilderness
areas, wetlands, areas providing habitat for certain species that have been
identified as "endangered" or "threatened" or other protected areas. We are
also subject to other federal, state and local laws covering the handling,
storage or discharge of materials, and we are subject to laws that otherwise
relate to the protection of the environment, safety and health. As an employer,
we are required to maintain a workplace free of recognized hazards likely to
cause death or serious injury and to comply with specific safety standards.
We will make expenditures in connection with environmental matters as part of
our normal operations and capital expenditures. In addition, the possibility
exists that stricter laws, regulations or enforcement policies could
significantly increase our compliance costs and the cost of any remediation
that might become necessary. We are subject to an inherent risk of incurring
environmental costs and liabilities because of our handling of oil, gas and
petroleum products, historical industry waste disposal practices and prior use
of gas flow meters containing mercury. There can be no assurance that we will
not incur material environmental costs and liabilities. Management believes,
based on our current knowledge, that we have obtained and are in current
compliance with all necessary and material permits and that we are in
substantial compliance with applicable material environmental and safety
regulations. Further, we maintain insurance coverages that we believe are
customary in the industry; however, there can be no assurance that our
environmental impairment insurance will provide sufficient coverage in the
event an environmental claim is made against us. See "Business and Properties--
Insurance." We are not aware of any existing environmental or safety claims
that would have a material impact upon our financial position or results of
operations.
Oil and Gas Properties
We own several non-operated working and overriding royalty interests in
producing and non-producing oil and gas properties. For the year ended December
31, 1998 and the nine months ended September 30, 1999, revenues from our oil
and gas properties were less than 1% of our total revenues, and for the same
period our oil and gas properties represented less than 1% of our total assets.
Title to Properties
As part of our pipeline construction process, we must obtain certain right-of-
way agreements from landowners whose property the proposed pipeline will cross.
The terms and cost of these agreements can vary greatly due
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<PAGE>
to a number of factors. In addition, as part of our acquisition process, we
will typically evaluate the underlying right-of-way agreements for the
particular pipeline to be acquired to determine that the pipeline owner has met
all terms and conditions of the underlying right-of-way agreements and that the
agreements are still in full force and effect. We typically rely upon outside
service organizations to review the right-of-way agreements and to make
suggestions to the seller as to any curative work required before closing. We
typically do not receive a title opinion or title policy as to these right-of-
way agreements due to the complexity of the records and expense.
Occasionally, we may seek to initiate condemnation proceedings where permitted
under state law to obtain a right-of-way necessary for pipeline construction
projects. We believe that this process is consistent with standards in the
pipeline industry. We believe that we hold good title to our pipeline systems,
subject only to defects which we believe are not material to the ownership of
our properties or results of operations. Substantially all of our pipeline
systems are pledged to secure borrowings under our $265 million credit
facility.
Insurance
Our operations are subject to many hazards inherent in the natural gas
transmission industry. We maintain insurance coverage for our operations and
properties at levels considered to be customary in the industry. There can be
no assurance, however, that our insurance coverage will be available or
adequate for any particular risk or loss or that we will be able to maintain
adequate insurance in the future at rates we consider reasonable. Although,
management believes that our assets are adequately covered by insurance, a
substantial uninsured loss could have a material adverse impact on us and our
financial position.
Legal Proceedings
We are currently involved in certain litigation that arose in the ordinary
course of business. Except as otherwise disclosed in the KPC acquisition
discussion in the "Regulatory Matters" section of this prospectus supplement,
management believes that all costs of settlements or judgments arising from
such suits will not have a material adverse effect on our consolidated
financial position or results of operations.
Employees and Contract Service Organizations
We had 206 full-time employees on December 1, 1999. We have arrangements with
other unaffiliated independent pipeline operating companies that service and
operate our extensive field operations and provide for emergency response
measures. We are not a party to any collective bargaining agreements. There
have been no significant labor disputes in the past.
In November 1999, we announced that, as part of an effort to streamline our
operations and increase efficiencies, we would have a reduction of
approximately 50 employees and take a pretax charge of approximately $1.7
million in the fourth quarter of 1999.
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<PAGE>
Management
The following table sets forth certain information concerning our directors and
executive officers. Each director holds office until the first annual meeting
of stockholders is held after his election or until his successor is elected or
appointed and qualified.
Directors and Executive Officers
<TABLE>
<CAPTION>
Officer or
Director
Name Age Position Since
---- --- -------- ----------
<S> <C> <C> <C>
Dan C. Tutcher.......... 50 Chairman of the Board, President, and Chief Executive Officer 1992
I. J. Berthelot, II..... 40 Executive Vice President, Chief Operating Officer and Director 1996
Richard A. Robert....... 33 Chief Financial Officer and Treasurer 1996
Duane S. Herbst......... 36 Vice President of Corporate Affairs and Secretary 1992
Bill Bray............... 51 Vice President of Business Development 1999
Ted Collins, Jr......... 61 Director 1997
Curtis J. Dufour, III... 50 Director 1999
Richard N. Richards..... 53 Director 1996
Bruce Withers........... 73 Director 1997
</TABLE>
Dan C. Tutcher has been Chairman of the Board, President and Chief Executive
Officer since our formation in 1992 and served as Treasurer from 1995 to 1996.
Since 1989, Mr. Tutcher has also been President and Chief Executive Officer of
Magic Gas Corp., a Texas corporation controlled by Mr. Tutcher. Prior to its
merger into our company in 1992, Mr. Tutcher served as a Director of Nugget Oil
Corporation, from 1990 to 1992. He also serves on the Utilities Advisory Board
of Cigna Corporation and on the board of the Interstate Natural Gas Association
of America. Mr. Tutcher holds a Bachelor of Business Administration degree from
Washburn University.
I. J. (Chip) Berthelot, II has been a Director since 1996 and serves as
Executive Vice President and Chief Operating Officer. Mr. Berthelot has been
with us since our formation in 1992. Mr. Berthelot joined the Company as Chief
Engineer and became Vice President of Operations in 1995, Chief Operating
Officer in 1996 and Executive Vice President in 1997. From 1991 to 1992, he was
a gas contracts representative with Mitchell Energy and Development Co. He is a
Professional Engineer, licensed in Texas, and holds a Bachelor of Science
degree in Petroleum and Natural Gas Engineering from Texas A&I University.
Richard A. Robert is Chief Financial Officer and Treasurer and has been with
the Company since its formation in 1992. Mr. Robert joined the Company as
Controller and became Chief Financial Officer and Treasurer in 1996. From 1988
to 1992 he was an audit associate in the energy audit division of Arthur
Andersen L.L.P. Mr. Robert is a certified public accountant and is a member of
the Texas Society of Certified Public Accountants. He holds a Bachelor of
Business Administration degree in Accounting from Southwest Texas State
University.
Duane S. Herbst has been Secretary of the Company since its formation in 1992
and Vice President of Corporate Affairs since 1996. From April 1992 until its
merger with our company in September 1992, he held the office of President of
Nugget. Since 1989, he has been Vice President of Rainbow Investments Company.
He holds a Master of Business Administration degree from the University of
Texas and a Bachelor of Science degree in Finance from Trinity University.
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<PAGE>
Bill Bray has been Vice President of Business Development since 1999 and his
responsibilities include the coordination of Midcoast's acquisition expansion
efforts, as well as the day-to-day management of the Company's business
development activities. Mr. Bray has been with Midcoast's business development
team since 1990. He holds a bachelor's degree in business administration from
Fort Hays State University.
Ted Collins, Jr. has been a Director since 1997. Mr. Collins has served as
President since 1988 for Collins & Ware, Inc., a private corporation active in
oil and gas exploration, production and property acquisition. He served as
President of Enron Oil & Gas Company from 1986 to 1988 and prior to that held
positions as President with HNG/Internorth Exploration Company and HNG Oil
Company as well as Executive Vice President of American Quasar Petroleum
Company. Mr. Collins also serves on the boards of Hanover Compressor Company,
Queen Sand Resources, Inc. and Chaparral Resources, Inc. He graduated from the
University of Oklahoma with a Bachelor of Science degree in Geological
Engineering.
Curtis J. Dufour III has been a Director since March 1999 and serves as Chief
Executive Officer of DPI/Midcoast, Inc., a wholly-owned subsidiary of our
company. Prior to its merger with and into our company in 1999, Mr. Dufour
served as President of Dufour Petroleum, Inc. from 1988 until 1999, and Chief
Executive Officer from 1996 until 1999. DPI was a private corporation engaged
in the NGL marketing and transportation business. Prior to forming DPI, Mr.
Dufour served as President of Choctaw Fuels, Inc., a company engaged in the
marketing and transportation of NGLs from 1978 until 1986. He graduated from
the University of Southern Mississippi with a Bachelor of Science degree in
Marketing.
Richard (Dick) N. Richards has been a Director since 1996. Mr. Richards is
currently Director of New Reusable Systems for The Boeing Company. Prior to
1998, he had been with NASA where he served in several capacities since 1980.
Mr. Richards was an astronaut with NASA until 1995 and flew one mission as
pilot and commanded three other space shuttle missions. He also served as
Manager of Space Shuttle Program Integration and Mission Director of the third
Hubble Space Telescope Space Shuttle servicing mission. He holds a Bachelor of
Science degree in Chemical Engineering from the University of Missouri and a
Master of Science in Aeronautical Systems from the University of West Florida.
Bruce Withers has served as Director since 1997. From August 1991 to October
1996, Mr. Withers served as Chairman and Chief Executive Officer of Trident
NGL, Inc. and Vice Chairman of Dynegy, Inc. Dynegy is an aggregator, processor,
transporter and marketer of energy products and services. Prior to joining
Dynegy, Mr. Withers served as President of the Transmission and Processing
Division of Mitchell Energy for 17 years. Mitchell Energy is engaged through
its subsidiaries in the exploration for and production of oil and gas, natural
gas processing and gas gathering and transmission. He has also served as
President and Chief Operating Officer of Liquid Energy Corp. and Southwestern
Gas Pipeline, two affiliates of Mitchell Energy. Mr. Withers holds a Bachelor
of Science degree in Petroleum and Natural Gas Engineering from Texas A & I
University.
S-38
<PAGE>
Underwriting
Midcoast has entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp. and Prudential Securities Incorporated are
acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
the common shares by each of the underwriters. The underwriters' obligations
are several, which means that each underwriter is required to purchase a
specified number of shares, but is not responsible for the commitment of any
other underwriter to purchase shares. Subject to the terms and conditions of
the underwriting agreement, each underwriter has severally agreed to purchase
the number of common shares set forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
CIBC World Markets Corp............................................ 920,000
Prudential Securities Incorporated................................. 920,000
Banc of America Securities LLC..................................... 40,000
Brean Murray & Co., Inc. .......................................... 20,000
Dain Rauscher Wessels.............................................. 20,000
First Union Securities, Inc. ...................................... 20,000
Jefferies & Company, Inc. ......................................... 20,000
Petrie Parkman & Co. .............................................. 20,000
Southcoast Capital L.L.C. ......................................... 20,000
---------
Total............................................................ 2,000,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus supplement
(other than those covered by the over-allotment option described below) if any
are purchased. Under the underwriting agreement, if an underwriter defaults in
its commitment to purchase shares, the commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
The shares should be ready for delivery on or about December 14, 1999 against
payment in immediately available funds. The representatives have advised
Midcoast that the underwriters propose to offer the shares directly to the
public at the public offering price that appears on the cover page of this
prospectus supplement. In addition, the representatives may offer some of the
shares to certain securities dealers at the initial offering price less a
concession of $.44 per share. The underwriters may also allow, and the dealers
may reallow, a concession not in excess of $.10 per share to other dealers.
After the shares are released for sale to the public, the representatives may
change the offering price and other selling terms at various times.
Midcoast has granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus
supplement, permits the underwriters to purchase a maximum of 300,000
additional common shares from Midcoast to cover over-allotments. If the
underwriters exercise all or part of this option, they will purchase shares
covered by the option at the initial public offering price that appears on the
cover page of this prospectus supplement, less the underwriting discount. If
this option is exercised in full, the total price to the public will be
approximately $36.9 million and the total proceeds to Midcoast will be
approximately $35.1 million. The underwriters have severally agreed that, to
the extent the over-allotment option is exercised, they will each purchase a
number of additional shares proportionate to the underwriters' initial amount
reflected in the foregoing table.
The following table provides information regarding the amount of the discount
to be paid to the underwriters by Midcoast:
<TABLE>
<CAPTION>
Total Without Exercise
Per of Total With Full Exercise of
Share Over-Allotment Option Over-Allotment Option
----- ---------------------- ---------------------------
<S> <C> <C>
$.80 $1,600,000 $1,840,000
</TABLE>
S-39
<PAGE>
Midcoast estimates that its total expenses of the offering, excluding the
underwriting discount, will be approximately $250,000.
Midcoast has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
Midcoast's directors and officers have agreed to a "lock-up" with respect to
the common shares and certain other Midcoast securities that they beneficially
own, including securities that are convertible into common shares and
securities that are exchangeable or exercisable for common shares. This means
that, subject to the exceptions described below, prior to June 5, 2000, such
persons may not offer, sell, pledge or otherwise dispose of such Midcoast
securities without the prior written consent of CIBC World Markets Corp. on
behalf of the underwriters, which consent will not be unreasonably withheld. As
part of this lock-up, Midcoast has also agreed not to issue any of its equity
securities or any securities that are convertible into any of its equity
securities, except as described below, for the period of 180 days following the
date of this prospectus supplement.
The lock-up does not restrict Midcoast from:
. granting options to purchase shares of common stock pursuant to any of the
Midcoast stock option plans;
. issuing shares of common stock pursuant to the exercise of the options
granted under the stock option plans; or
. issuing unregistered shares of common stock to acquire a business,
provided that the transferees of such shares enter into a contractual
"lock-up" similar to Midcoast's lock-up.
The director lock-up of Mr. Collins does not cover approximately one-half of
the 541,097 shares of common stock (including 139,496 shares issuable upon
exercise of a warrant) beneficially owned by a corporation in which he is a
shareholder. These shares represent the approximate number of shares to which
other shareholders of the corporation would be entitled upon its liquidation.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with applicable United States law:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus supplement. If a short position
is created in connection with the offering, the representatives may engage
in syndicate covering transactions by purchasing the shares in the open
market. The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold these shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither Midcoast nor the underwriters make any representation or prediction as
to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the American Stock Exchange or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
S-40
<PAGE>
From time to time, CIBC World Markets Corp. and Prudential Securities provide
financial advisory services to Midcoast for which they receive customary
compensation. Midcoast may use more than ten percent of the net proceeds of the
sale of the common stock to repay indebtedness it owes to Canadian Imperial
Bank of Commerce, an affiliate of CIBC World Markets Corp. and Prudential
Securities Credit Corp., an affiliate of Prudential Securities. Therefore, the
offering is being made in compliance with the requirements of Rule 2710(c)(8)
of the National Association of Securities Dealers, Inc. Conduct Rules.
Legal Matters
Certain legal matters relating to the validity of the common stock will be
passed upon by Porter & Hedges, L.L.P., Houston, Texas. Certain legal matters
related to this offering will be passed upon for the underwriters by Andrews &
Kurth L.L.P., Houston, Texas.
Experts
Our consolidated financial statements as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 incorporated by
reference in this prospectus supplement and the accompanying prospectus have
been audited by Hein + Associates LLP, certified public accountants, as set
forth in their report dated March 18, 1999, included in reliance upon the
authority of said firm as experts in accounting and auditing.
The combined financial statements of KPC (as defined therein) as of December
31, 1998 and 1997 and for each of the three years in the period ended December
31, 1998 incorporated by reference into this prospectus supplement and the
accompanying prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report dated March 15, 1999, included in
reliance upon the authority of said firm as experts in accounting and auditing.
Transfer Agents and Registrars
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company at its principal office located in the City of New
York.
S-41
<PAGE>
PROSPECTUS
$200,000,000
Midcoast Energy Resources, Inc.
Debt Securities
Preferred Stock
Common Stock
Warrants
PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND
INTEREST, ON DEBT SECURITIES UNCONDITIONALLY GUARANTEED
BY MIDCOAST ENERGY RESOURCES, INC. AND SUBSIDIARY REGISTRANTS
- -------------------------------------------------------------------------------
You should read this prospectus and any supplement carefully before you
invest. This prospectus may not be used to consummate sales of securities
unless accompanied by a prospectus supplement.
The common stock offered in this prospectus may, subject to certain
conditions, also be offered and sold from time to time pursuant to this
prospectus by Selling Security Holders (as defined later). See "Selling
Security Holders" and "Plan of Distribution" for information about the sales
of common stock pursuant to this prospectus by Selling Security Holders.
Our common stock is listed and traded on the American Stock Exchange under the
symbol "MRS."
- -------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved nor disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
This Prospectus is dated December 6, 1999.
<PAGE>
You should rely only on the information incorporated by reference or provided
in this prospectus or any prospectus supplement. We have not authorized anyone
else to provide you with different information. We are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents.
Table of Contents
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
About This Prospectus..................................................... 3
Where You Can Find More Information....................................... 3
Incorporation Of Certain Documents By Reference........................... 4
Summary................................................................... 5
Forward-Looking Statements................................................ 5
Use of Proceeds........................................................... 6
Ratio of Earnings to Fixed Charges and Earnings to Fixed Charges and
Preferred Stock Dividends................................................ 6
Description of Debt Securities............................................ 6
Description of Capital Stock.............................................. 12
Description of Warrants................................................... 13
Selling Security Holders.................................................. 15
Plan of Distribution...................................................... 15
Legal Matters............................................................. 16
Experts................................................................... 17
</TABLE>
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About this Prospectus
Midcoast Energy Resources, Inc. (the "Company," "we," "us," and "our") may
offer from time to time any combination of the securities described in this
prospectus. The aggregate initial offering price of the securities that we will
offer will not exceed $200,000,000. We will offer the securities in amounts, at
prices and on terms to be determined by market conditions at the time of our
offering. This prospectus also may be used for resales of the securities issued
under this prospectus. See "Use of Proceeds."
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. This
means:
. over the next two years, we may issue the debt securities, preferred
stock, common stock and warrants covered by this prospectus;
. this prospectus provides a general description of the securities we may
offer;
. we will provide a prospectus supplement each time we issue the securities;
. the prospectus supplement will provide specific information about the
terms of that offering and also may add, update or change information
contained in this prospectus.
You should read both this prospectus and any prospectus supplement together
with additional information described under the heading "Where You Can Find
More Information."
Where You Can Find More Information
We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-3 under the Securities Act of 1933, as amended
("Securities Act"), with respect to the securities we are offering. This
prospectus does not contain all the information contained in the registration
statement, such as our exhibits and schedules. You should refer to the
registration statement, including the exhibits and schedules, for further
information about us and the securities we are offering. Statements we make in
this prospectus about certain contracts or other documents are not necessarily
complete. When we make such statements, we refer you to the copies of the
contracts or documents that are filed as exhibits to the registration statement
because those statements are qualified in all respects by reference to those
exhibits. The registration statement, including exhibits and schedules, is on
file at the offices of the SEC and may be inspected without charge.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings, including the registration
statement, are available to the public over the Internet at the SEC's web site
at http://www.sec.gov. We invite you to visit our web site at
http://www.midcoastenergy.com. You also may read and copy any document we file
at the SEC's public reference rooms in Washington, D.C.; New York, New York;
and Chicago, Illinois. The Public Reference Room in Washington, D.C. is located
at 450 Fifth Street, N.W. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms.
We also provide information to the AMEX because our common stock is traded on
the AMEX. You may obtain reports and other information at the offices of the
AMEX at 86 Trinity Place, New York, New York 10006-1881.
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Incorporation of Certain Documents by Reference
SEC rules allow us to include some of the information required to be in the
registration statement by incorporating that information by reference to
documents we file with the SEC. That means we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus. Furthermore,
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below, including any future filings made with the SEC under Sections 13(a),
13(c), 14, or 15(d) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), until we sell all of the securities covered by this
prospectus:
. Current Report on Form 8-K, filed on October 21, 1996 and Form 8-K/A filed
on November 13, 1996;
. Prospectus, filed June 27, 1997, pursuant to Rule 424(b) of the Securities
Act;
. Current Reports on Form 8-K, filed on November 13, 1997 and Form 8-K/A
filed on January 12, 1998;
. Annual Report on Form 10-K for the year ended December 31, 1997,
Form 10-K/A-1 filed on February 1, 1999 and Form 10-K/A-2 filed on
February 2, 1999;
. Proxy Statement on Schedule 14A, filed on April 16, 1998;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998;
. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998;
. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and
Form 10-Q/A filed on January 7, 1999;
. Current Reports on Form 8-K, filed on September 22, 1998 and Form 8-K/A
filed on November 20, 1998; and
. The description of the Company's common stock contained in Form 8-A, filed
on July 24, 1996, including any amendments or reports that have been filed
to update the description.
We will provide, without charge, to each person to whom a copy of this
prospectus has been delivered, including any beneficial owner, a copy of any of
these filings, by writing or telephoning us at the following address:
Midcoast Energy Resources, Inc.
1100 Louisiana, Suite 2950
Houston, Texas 77002
(713) 650-8900
Attention: Duane S. Herbst, Corporate Secretary
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Summary
The Company
The Company transports, gathers, processes and markets natural gas and other
petroleum products through 57 company-owned interstate and intrastate
pipelines. These pipelines include 5 transmission pipeline systems, 22 end-user
pipeline systems and 30 gathering systems covering approximately 2,300 miles in
nine states with an aggregate throughput capacity of over 1.9 Bcf/day. We are a
Houston-based pipeline company with regional offices in Texas, Alabama,
Louisiana and Mississippi.
We provide transportation services through our pipelines to end-users, natural
gas producers and other pipeline companies. We also offer natural gas marketing
and processing services to these same customers. In addition, we acquire or
construct pipelines to supply natural gas to industrial and municipal end-users
and gather natural gas at the wellhead for natural gas producers.
Business Strategy
Our principal business strategy is to increase our earnings and cash flow by
acquiring pipeline systems in targeted growth areas, by enhancing the
profitability of our existing systems and processing plants through increased
utilization and by improving cost efficiencies.
We implement our strategy through the following steps:
. Acquire pipeline and processing systems in areas where demand for natural
gas transportation services is growing;
. Aggressively market and expand existing pipelines and processing systems
to increase their utilization;
. Maximize operating efficiencies by focusing on reducing costs.
. Pursue direct sales to industrial plants and municipality end-users who
seek alternative supplies to meet their energy needs; and
. Construct pipelines where opportunity arises.
Our principal executive offices are located at 1100 Louisiana, Suite 2950,
Houston, Texas 77002, and our telephone number is (713) 650-8900.
Forward-Looking Statements
The statements we make in this prospectus, in any prospectus supplement, or in
the documents we have incorporated by reference that are not statements of
historical fact, may be "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-
looking statements generally can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "estimate," "anticipate"
or "believe," or similar terminology. The forward-looking statements may
include discussions about business strategy and expectations concerning market
position, future operations, margins, profitability, liquidity and capital
resources, and statements concerning the integration into our business of the
operations we have acquired. Although we believe that the expectations in such
statements are or will be reasonable, we cannot give any assurance that those
expectations will be correct. We caution you not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
prospectus or any prospectus supplement. Our operations are subject to several
uncertainties, risks and other influences, many of which are outside our
control and any of which could materially affect our results of operations and
ultimately prove the statements we make to be inaccurate. We discuss important
factors that could cause actual results to differ materially from our
expectations elsewhere in this prospectus or in any prospectus supplement.
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<PAGE>
Use of Proceeds
Except as otherwise described in any prospectus supplement, we will use the net
proceeds from the sale of securities for general corporate purposes, which may
include refinancings of indebtedness, working capital, capital expenditures,
acquisitions and repurchases of securities. Specific information concerning the
use of proceeds from any sale of securities will be included in the prospectus
supplement relating to such securities.
Ratio of Earnings to Fixed Charges and
Earnings to Fixed Charges and Preferred Stock Dividends
The ratio of our earnings to our fixed charges and earnings to fixed charges
and preferred stock dividends for each of the fiscal years indicated and for
the nine months ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Nine months Ended
September 30, Year Ended December 31,
----------------- ------------------------
1998 1997 1996 1995 1994 1993
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges........................... 4.25 5.99 5.35 7.16 1.72 5.24
Ratio of earnings to fixed charges
and preferred stock dividends..... 4.25 5.99 5.08 6.14 1.33 4.01
</TABLE>
For these ratios, earnings consist of income before income taxes and fixed
charges. Fixed charges consist of interest expense, including amounts
capitalized, that portion of rent expense which management deems to be
attributable to interest costs and amortization of debt expense.
Description of Debt Securities
The debt securities will be the general unsecured obligation of the Company.
The following description of the Company's unsecured debt securities will be of
either senior notes and debentures ("Senior Debt Securities") or subordinated
note and debentures ("Subordinated Debt Securities") to be issued under one or
more separate indentures, in each case between the Company, the Subsidiary
Guarantors (as defined later) and the Trustee, and in substantially the form
that has been filed as an exhibit to the registration statement of which this
prospectus is a part, subject to such amendments or supplements as may be
adopted from time to time. We will issue Senior Debt Securities under a Senior
Indenture and Subordinated Debt Securities under a Subordinated Indenture. We
refer to the Senior Indenture and the Subordinated Indenture below singularly
as the Indenture or collectively as the Indentures. We refer to the Senior
Trustee and the Subordinated Trustee below individually as a Trustee and
collectively as the Trustees.
We have summarized selected provisions of the Indentures below. The summary is
not complete. The particular terms of the debt securities we might offer and
the extent to which these general provisions apply will be described in a
prospectus supplement relating to the offered debt securities. We have included
the forms of the Indentures under which the offered debt securities will be
issued as exhibits to the registration statement, and you should read the
Indentures for provisions that may be important to you.
General
The payment obligations of the Company under any debt securities may, if
specified in any prospectus supplement, be fully and unconditionally guaranteed
by one or more of the following subsidiaries of the Company: Magnolia
Resources, Inc., Magnolia Gathering, Inc., Magnolia Pipeline Corporation,
Midcoast Holdings No. One, Inc., Midcoast Marketing, Inc., Midcoast Interstate
Transmission, Inc., Tennessee River Intrastate Gas Company, Inc., Mid Louisiana
Gas Transmission Company, Mid Louisiana Gas Company, Midcoast Gas Pipeline,
Inc., Midcoast Gas Services, Inc., and Creole Gas Pipeline Corporation (the
"Subsidiary Guarantors"). If any series of debt securities is guaranteed by a
Subsidiary Guarantor (a
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"Subsidiary Guarantee"), the applicable prospectus supplement will identify
each Subsidiary Guarantor and describe such Subsidiary Guarantee, including the
circumstances in which it may be released. Any guarantee of debt securities by
a Subsidiary Guarantor will be on a full and unconditional basis.
Except as may be described in any prospectus supplement, the Indentures do not
limit the aggregate principal amount of debt securities that can be issued
thereunder. Debt securities may be issued in one or more series, each in an
aggregate principal amount authorized by the Company before issuance, and may
be in any currency or currency unit that we may designate. We may issue debt
securities of a series in registered or global form. The rights of holders of
debt securities will be limited to the assets of the Company and the debt
securities will not be obligations of any of the Company's subsidiaries, except
in the case of any debt securities that are guaranteed by such subsidiaries.
Except as may be described in any prospectus supplement, the Indentures do not
limit the ability of the Company's subsidiaries to incur such restrictions in
the future. The right of the Company to participate in the assets of any
subsidiary (and thus the ability of holders of the debt securities to benefit
indirectly from such assets) is generally subject to the prior claims of
creditors, including trade creditors, of that subsidiary, except to the extent
that the Company is recognized as a creditor of such subsidiary, in which case
the Company's claims would still be subject to any security interest of other
creditors of such subsidiary. Unless the debt securities are guaranteed by the
Company's subsidiaries, the debt securities will be structurally subordinated
to creditors, including trade creditors, of subsidiaries of the Company with
respect to the assets of the subsidiaries against which such creditors have a
more direct claim. The Senior Debt Securities will rank equally with all of our
other senior debt. The Subordinated Debt Securities will have a junior position
to all of our senior debt.
Other than as may be described in a prospectus supplement, neither Indenture
will contain any covenant or provision that affords debt holders protection in
the event of a highly leveraged transaction by the Company. These same holders
would not have any right to require the Company to repurchase the debt
securities, in the event that the credit rating of any debt securities declined
as a result of the Company's involvement in a takeover, recapitalization,
similar restructuring or otherwise.
A prospectus supplement including the Indentures, filed as an exhibit, relating
to any series of debt securities being offered by the Company will include
specific terms relating to the offering. These terms will include some or all
of the following:
. the title and type of debt securities being offered, which may include
medium term notes;
. the total principal amount of debt securities being offered;
. whether the debt securities will be issued in one or more form of global
securities and whether such global securities are to be issuable in
temporary global form or permanent global form;
. whether the debt securities will be guaranteed by any of the subsidiaries
of the Company;
. the dates on which the principal of, and premium, if any, on the offered
debt securities is payable;
. the interest rate or the method of determining the interest rate;
. the date from which interest will accrue;
. the interest payment dates;
. the place where the principal, premium and interest is payable;
. any optional redemption periods;
. any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
. whether the debt securities will be convertible into shares of common
stock or exchangeable for other of our securities, and if so, the terms of
conversion or exchange;
. the currency or currencies, if other than U.S. dollars, in which principal
payments or other payments will be payable;
7
<PAGE>
. events causing acceleration of maturity;
. any provisions granting special rights to holders when the specified event
occurs;
. any changes to or additional events of default or covenants;
. any material tax consequences and special tax implications of ownership
and disposition of the debt securities; and
. any other terms of the debt securities.
The debt securities will be issued in registered form. There will be no service
charge for any registration, transfer or exchange of debt securities. We may,
however, require payment of an amount that would be sufficient to cover any tax
or other governmental charge we may incur.
We may sell the debt securities at a discount (which may be substantial) below
their stated principal amount, either bearing no interest or bearing interest
at a rate that may be below the market rate at the time we issue the debt
securities. We will describe any material tax consequences and other special
considerations applicable to discounted debt securities in the prospectus
supplement.
If we sell any of the offered debt securities for any foreign currency or
currency unit, or if any of the principal, premium or interest, if any, is
payable on any of the offered debt securities, the restrictions, elections, tax
consequences, specific terms and other information pertaining to the offered
debt securities and such foreign currency or foreign currency unit will be set
forth in the prospectus supplement describing such offered debt securities.
Denominations
We will issue the debt securities in registered form of $1,000 each or
multiples thereof or an equivalent value if the securities are issued in a
foreign currency.
Subordination
Under the Subordinated Indenture, payment of the principal, interest and any
premium on the Subordinated Debt Securities generally will be subordinated and
junior in right of payment to the prior payment in full of all Senior
Indebtedness. The Subordinated Indenture provides that no payment of principal,
interest and any premium on the Subordinated Debt Securities may be made in the
event:
. of any insolvency, bankruptcy or similar proceeding involving the Company
or our property;
. we fail to pay the principal, interest, any premium or any other amounts
on any Senior Indebtedness when due;
. of a default (other than a payment default with respect to the Senior
Indebtedness) that imposes a payment blockage on the Subordinated Debt
Securities for a maximum of 179 days at any one time, unless the Event of
Default has been cured or waived or shall no longer exist; or
. the principal and any accrued interest on any series of Subordinated Debt
Securities has been declared due and payable upon an Event of Default
described in the Subordinated Debt Indenture and such declaration has not
been rescinded.
In the event of any bankruptcy, insolvency, reorganization or other similar
proceeding relating to us, whether voluntary or involuntary, all of our
obligations to holders of Senior Indebtedness shall be entitled to be paid in
full before any payment shall be made on account of the principal of, or
premium, if any, or interest, if any, on the Subordinated Debt Securities of
any series.
8
<PAGE>
In the event of any such bankruptcy, insolvency, reorganization or other
similar proceeding, holders of the Subordinated Debt Securities of any series,
together with holders of indebtedness ranking equally with the Subordinated
Debt Securities, shall be entitled, ratably, to be paid amounts that are due to
them, but only from assets remaining after we pay in full the amounts that we
owe on our Senior Indebtedness. We will make these payments before we make any
payment or other distribution on account of any indebtedness that ranks junior
to the Subordinated Debt Securities. However, if we have paid in full all of
the sums that we owe with respect to our Senior Indebtedness and creditors in
respect of our obligations associated with such derivative products have not
received payment in full of amounts due to them, then the available remaining
assets shall be applied to payment in full of those obligations before any
payment is made on the Subordinated Debt Securities.
In the event that we are in default on any of our Senior Indebtedness or in the
event that any such default would occur as a result of certain payments, then
we may not make any payments on the Subordinated Debt Securities or effect any
exchange or retirement of any of the Subordinated Debt Securities unless and
until such default has been cured or waived or otherwise ceases to exist.
No provision contained in the Subordinated Indenture or the Subordinated Debt
Securities affects the obligation of the Company, which is absolute and
unconditional, to pay, when due, principal of, premium, if any, and interest on
and any additional amounts with respect to the Subordinated Debt Securities.
The subordination provisions of the Subordinated Indenture and the Subordinated
Debt Securities do not prevent the occurrence of any default or Event of
Default under the Subordinated Indenture or limit the rights of the
Subordinated Trustee or any holder of Subordinated Debt Securities, subject to
the three preceding paragraphs, to pursue any other rights or remedies with
respect to the Subordinated Debt Securities.
As a result of these subordination provisions, in the event of the liquidation,
bankruptcy, reorganization, insolvency, receivership or similar proceeding or
an assignment for the benefit of our creditors or any of our subsidiaries or a
marshaling of assets or liabilities of the Company and its subsidiaries,
holders of Subordinated Debt Securities may receive ratably less than other
creditors.
If this prospectus is being delivered in connection with a series of
Subordinated Debt Securities, the accompanying prospectus supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Indebtedness outstanding as of the end of the most recent
fiscal quarter.
The Subordinated Indenture defines Senior Indebtedness to include all notes or
other unsecured evidences of indebtedness, including guarantees of the Company
for money borrowed by the Company, not expressed to be subordinate or junior in
right of payment to any other indebtedness of the Company and all extensions of
such indebtedness.
Events of Default; Remedies
The following are Events of Default under each Indenture:
. our failure to pay principal or any premium on any debt security when due;
. our failure to pay any interest on any debt security when due, continued
for 30 days;
. our failure to deposit any mandatory sinking fund payment when due,
continued for 30 days;
. our failure to perform any other covenant or warranty in the Indenture
that continues for 90 days after written notice;
. our certain events of bankruptcy, insolvency or reorganization; and
. our any other Event of Default as may be specified with respect to debt
securities of such series.
An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities. The Trustee may withhold notice to the holders of debt securities
of any
9
<PAGE>
default (except in the payment of principal or interest) if the Trustee
considers withholding of notice to be in the best interest of the holders.
If an Event of Default occurs, either the Trustee or the holders of at least
25% of the principal amount of the outstanding debt securities may declare the
principal amount of the debt securities of the applicable series to be due and
payable immediately. If this happens, subject to certain conditions, the
holders of a majority of the principal amount of the outstanding debt
securities of such series can void the declaration. These conditions include
the requirement that we have paid or deposited with the Trustee a sum
sufficient to pay all overdue principal and interest payments on the series of
debt securities subject to the default. If an Event of Default occurs due to
certain events of bankruptcy, insolvency or reorganization, the principal
amount of the outstanding debt securities of all series will become immediately
due and payable without any declaration or other act on the part of either
Trustee or any holder.
Depending on the terms of our indebtedness, an Event of Default under an
Indenture may cause a cross default on such other indebtedness.
Other than its duties in the case of default, a Trustee is not obligated to
exercise any of its rights or powers under any Indenture at the request, order
or direction of any holder or group of holders unless the holders offer the
Trustee reasonable indemnity. If the holders provide reasonable
indemnification, the holders of a majority of the principal amount of any
series of debt securities may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any power
conferred upon the Trustee for any series of debt securities.
The holders of a majority of the principal amount outstanding of any series of
debt securities may, on behalf of all holders of such series, waive any past
default under the Indenture, except in the case of a payment of principal or
interest default.
We are required to provide to each Trustee an annual statement of our
performance of the Company's obligations under the Indenture and any statement
of default, if applicable.
Covenants
Under the Indentures, we will:
. pay the principal, interest and any premium on the debt securities when
due;
. maintain a place of payment;
. deliver a report to the Trustee at the end of each fiscal year reviewing
the Company's obligations under the Indentures; and
. deposit sufficient funds with any payment agent on or before the due date
for any principal, interest or any premium.
Modification or Amendment of Indentures
Under each Indenture, all rights and obligations and the rights of the holders
may be modified or amended with the consent of the holders of a majority in
aggregate principal amount of the outstanding debt securities of each series
affected by the modification or amendment. No modification or amendment may,
however, be made without the consent of the holders of any debt securities if
the following provisions are affected:
. change in the stated maturity date of the principal payment or installment
of any principal payment;
. reduction in the principal amount or premium on, or interest on any of the
debt securities;
. reduction in the percentage required for modifications or amendment to be
effective against any holder of any debt securities.
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<PAGE>
Consolidation, Merger and Sale of Assets
Each Indenture generally permits a consolidation or merger between us and
another corporation. Each Indenture also permits us to sell all or
substantially all of our property and assets. If this happens, the surviving or
acquiring corporation will assume all of our responsibilities and liabilities
under the Indentures, including the payment of all amounts due on the debt
securities and the performance of the covenants in the Indentures.
We will only consolidate or merge with or into any other company or sell all,
or substantially all, of our assets according to the terms and conditions of
the Indentures. The surviving or acquiring company will be substituted for us
in the Indentures with the same effect as if it had been an original party to
the Indenture. Thereafter, the successor company may exercise our rights and
powers under any Indenture, in our name or in its own name. Any act or
proceeding our board of directors or any of our officers are required or
permitted to do may be done by the board of directors or officers of the
successor company. If we sell all or substantially all of our assets, we shall
be released from all our liabilities and obligations under any Indenture and
under the debt securities.
Discharge and Defeasance
We will be discharged from our obligations under the debt securities of any
series at any time if we irrevocably deposit with the Trustee enough cash or
government securities to pay the principal, interest, any premium and any other
sums due through the stated maturity date or redemption date of the debt
securities of the series. In this event, the Company will be deemed to have
paid and discharged the entire indebtedness on all outstanding debt securities
of the series. Accordingly, the Company's obligations under the applicable
Indenture and the debt securities of such series to pay any principal, premium,
or interest, if any, shall cease, terminate and be completely discharged. The
holders of any debt securities shall then only be entitled to payment out of
the money or government securities deposited with the Trustee and such holders
of debt securities of such series will not be entitled to the benefits of the
Indenture except as relate to the registration, transfer and exchange of debt
securities and the replacement of lost, stolen or mutilated debt securities.
Payment and Paying Agents
We will pay the principal, interest and premium on fully registered securities
at designated places. We will pay by check mailed to the person in whose name
the debt securities are registered on the day specified in the Indentures or
any prospectus supplement. We will pay debt securities payments in other forms
at a place we designate and specify in a prospectus supplement.
Form, Exchange, Registration and Transfer
Fully registered debt securities may be transferred or exchanged at the
corporate trust office of the Trustee or at any other office or agency we
maintain for such purposes without the payment of any service charge except for
any tax or governmental charge. The registered securities must be duly endorsed
or accompanied by a written instrument of transfer, if required by us or the
security registrar. We will describe any procedures for the exchange of debt
securities for other debt securities of the same series in the prospectus
supplement for that offering.
Global Securities
We may issue the debt securities of a series in whole or in part in the form of
one or more global certificates that will be deposited with a depositary we
identify in a prospectus supplement. We may issue global securities in
registered form and in either temporary or permanent form. Unless and until it
is exchanged in whole or part for the individual Debt Securities it represents,
the depositary or its nominee may not transfer a global security except as a
whole. The depositary for a global security and its nominee may only transfer
the global security between themselves or their successors.
We will make principal, premium and interest payments on global securities to
the depositary or the nominee it designates as the registered owner for such
global securities. The depositary or its nominee will be responsible
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<PAGE>
for making payments to you and other holders of interests in the global
securities. We and the paying agents will treat the persons in whose names the
global securities are registered as the owners of such global securities for
all purposes. Neither we nor the paying agents have any direct responsibility
or liability for the payment of principal, premium or interest to owners of
beneficial interests in the global securities.
Description of Capital Stock
As of December 31, 1998, our authorized capital stock was 25,000,000 shares of
common stock, par value $.01 per share, and 5,000,000 shares of preferred
stock, par value $.001 per share. As of that date, we had 5,719,665 shares of
common stock outstanding, including 141,000 shares held in treasury, and no
shares of preferred stock outstanding. We have summarized below the key terms
and provisions of the Company's capital stock. The descriptions are not
complete. You should read the actual provisions of our Articles of
Incorporation, as amended ("Articles"), and our bylaws that relate to your
individual investment strategy. We have previously filed our Articles and
bylaws with the SEC.
Preferred Stock
The following description of the terms of the preferred stock sets forth
certain general terms and provisions of the preferred stock we may offer. If we
offer preferred stock, we will describe the specific designations and rights in
the prospectus supplement and we will file a description with the SEC.
Our Articles authorize us to issue up to 5,000,000 shares of preferred stock,
none of which are currently outstanding. Our board of directors can, without
approval of stockholders, issue one or more series of preferred stock. The
board of directors can also determine the number of shares of each series and
the rights, preferences and limitations of each series including the dividend
rights, voting rights, conversion rights, redemption rights and any liquidation
preferences of any wholly unissued series of preferred stock, the number of
shares constituting each series and the terms and conditions of issue. In some
cases, the issuance of preferred stock could delay a change in control of the
Company and make it harder to remove present management. Under certain
circumstances, preferred stock could also restrict dividend payments to holders
of our common stock.
The preferred stock will, when issued, be fully paid and non-assessable.
We will name the transfer agent, registrar, and dividend disbursement agent for
a series of preferred stock in a prospectus supplement. The registrar for
shares of preferred stock will send notices to stockholders of any meetings at
which holders of the preferred stock have the right to elect directors or to
vote on any other matter.
Common Stock
Listing. Our outstanding shares of common stock are listed on the AMEX under
the symbol "MRS." Any additional common stock we issue will also be listed on
the AMEX.
Dividends. Common stockholders may receive dividends if the board of directors
declares them out of legally available funds. We may pay dividends in cash,
stock or another form. In certain cases, common stockholders may not receive
dividends until we have satisfied our obligations to any preferred
stockholders.
Fully Paid. All outstanding shares of common stock are fully paid and non-
assessable. Any additional common stock we issue will also be fully paid and
non-assessable.
Voting Rights. Each share of common stock is entitled to one vote in the
election of directors and other matters. A majority of the issued and
outstanding common stock constitutes a quorum at any meeting of stockholders,
and the vote by the holders of a majority of the outstanding shares is required
to effect certain fundamental corporate changes such as liquidation, merger or
amendment of the Articles. Common stockholders are not entitled to preemptive
or cumulative voting rights.
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Other Rights. We will notify common stockholders of any stockholders' meetings
according to applicable law. If we liquidate, dissolve or wind-up our business,
either voluntarily or not, common stockholders will share equally in the assets
remaining after we pay our creditors and preferred stockholders.
Transfer Agent and Registrar. Our transfer agent and registrar is American
Stock Transfer & Trust Company, New York, New York.
Outstanding Warrants
The Company has outstanding Warrants. Warrants to acquire 109,999 shares of
common stock at a price of $12.909 per share commencing in August 1998 were
outstanding at December 31, 1998. These warrants expire in August 2001. We
issued the warrants in our 1996 public offering, and they are registered under
the Securities Act.
In October 1997, we completed our acquisition through merger of Republic Gas
Partners, L.L.C. ("Republic"), which was owned by Cortez Natural Gas, Inc.
("Cortez"), a corporation controlled by a member of our board of directors,
Republic Gas Corporation ("RGC") and Riverbend Gas Company ("Riverbend"). As a
result of the merger, Cortez, RGC and Riverbend collectively received, among
other consideration, warrants to acquire up to 137,502 shares of common stock
at a price of $19.773 per share, commencing in October 1997. This total number
of warrants includes warrants for 110,001 shares of common stock and an
additional 27,501 warrants subject to certain contingencies. These warrants
expire in October 2000. In connection with this acquisition, the Company
granted Cortez, RGC and Riverbend certain demand and piggyback registration
rights regarding the shares of common stock and warrants purchased.
Description of Warrants
We may issue warrants, including warrants to purchase debt securities,
preferred stock, common stock or other securities. We may issue warrants
independently or together with other securities that may be attached to or
separate from the warrants. We will issue each series of warrants under a
separate warrant agreement that will be entered into between us and a bank or
trust company, as warrant agent, and will be described in the prospectus
supplement relating to the particular issue of warrants. The warrant agent will
act solely as an agent of the Company in connection with the warrant of such
series and will not assume any obligation or relationship of agency for or with
holders or beneficial owners of warrants. The following describes certain
general terms and provisions of the warrants offered in this prospectus. We
will set forth further terms of the warrants and the applicable warrant
agreement in the applicable prospectus supplement.
Debt Warrants
The applicable prospectus supplement will describe the terms of any debt
warrants, including the following:
(1) the title of such debt warrants;
(2) the offering price for such debt warrants;
(3) the aggregate number of such debt warrants;
(4) the designation and terms of such debt securities purchasable upon
exercise of such debt warrants;
(5) if applicable, the designation and terms of the securities with which
such debt warrants are issued and the number of such debt warrants
issued with each security;
(6) if applicable, the date from and after which such debt warrants and any
securities issued therewith will be separately transferable;
(7) the principal amount of debt securities purchasable upon exercise of a
debt warrant and the price at which such principal amount of debt
securities may be purchased upon exercise;
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(8) the date on which the right to exercise such debt warrants shall
commence and the date on which such right shall expire;
(9) if applicable, the minimum or maximum amount of such debt warrants which
may be exercised at any one time;
(10) whether the debt warrants represented by the debt warrant certificates
or debt securities that may be issued upon exercise of the debt warrants
will be issued in registered form;
(11) information with respect to book-entry procedures, if any;
(12) the currency, currencies or currency units in which the offering price,
if any, and the exercise price are payable;
(13) if applicable, a discussion of certain United States federal income tax
considerations;
(14) the antidilution provisions of such debt warrants, if any;
(15) the redemption or call provisions, if any, applicable to such debt
warrants; and
(16) any additional terms of the debt warrants, including terms, procedures
and limitations relating to the exchange and exercise of such debt
warrants.
Common and Preferred Stock Warrants
The applicable prospectus supplement will describe the terms of any warrants
for common stock or preferred stock the Company issues, including:
(1) the title of such warrants;
(2) the offering price of such warrants;
(3) the aggregate number of such warrants;
(4) the designation and terms of the common stock or preferred stock issued
by the Company purchasable upon exercise of such warrants;
(5) if applicable, the designation and terms of the securities with which
such warrants are issued and the number of such warrants issued with
each such security;
(6) if applicable, the date from and after which such warrants and any
securities issued therewith will be separately transferrable;
(7) the number of shares of common stock or preferred stock issued by the
Company purchasable upon exercise of the warrants and the price at which
such shares may be purchased upon exercise;
(8) the date on which the right to exercise such warrants shall commence and
the date on which such right shall expire;
(9) if applicable, the minimum or maximum amount of such warrants which may
be exercised at any one time;
(10) the currency, currencies or currency units in which the offering price,
if any, and the exercise price are payable;
(11) if applicable, a discussion of certain United States federal income tax
considerations; and
(12) the antidilution provisions of the warrants, if any.
Warrants for the purchase of preferred stock or common stock will be in
registered form only. Prior to the exercise of any warrants, holders of such
warrants will not have any of the rights of holders of common stock purchasable
upon such exercise, including the right to receive payments of dividends, if
any, on the common stock purchasable upon such exercise, or to exercise any
applicable right to vote.
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Selling Security Holders
This prospectus has also been prepared for use by persons who may be entitled
to offer common stock under circumstances requiring the use of a prospectus
(such persons being referred to as "Selling Security Holders"); provided,
however, that no Selling Security Holder will be authorized to use this
prospectus for an offer of such common stock without first obtaining our
consent. We may consent to the use of this prospectus by Selling Security
Holders for a limited period of time and subject to limitations and conditions,
which may be varied by agreement between us and the Selling Security Holders.
Information identifying any such Selling Security Holder and disclosing such
information concerning the Selling Security Holder and the amount of common
stock to be sold as may then be required by the Securities Act and the rules of
the SEC will be set forth in a supplement to this prospectus.
Plan of Distribution
We may sell the securities in or outside of the United States pursuant to this
prospectus: (1) through underwriters or dealers; (2) directly to a limited
number of purchasers or to a single purchaser; or (3) through agents. A
prospectus supplement with respect to the securities will describe the terms of
specific offerings of the securities, including the name or names of any
underwriters or agents, the purchase price of the securities and the proceeds
to us from such sales, any delayed delivery arrangements, any underwriting
discounts and other items constituting underwriters' compensation, any initial
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
If we use underwriters in the sale, the underwriters will acquire the
securities for their own account and may resell them from time to time in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. We may
offer the securities to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more
firms acting as underwriters. The underwriter or underwriters with respect to a
particular underwritten offering of securities will be named in the prospectus
supplement relating to such offering and, if an underwriting syndicate is used,
we will set forth the managing underwriter or underwriters on the cover of such
prospectus supplement. Unless otherwise described in the prospectus supplement
relating thereto, the obligations of the underwriters to purchase the
securities in any such sale will be subject to conditions precedent, and the
underwriters will be obligated to purchase all the securities if any are
purchased.
During and after an offering through underwriters, the underwriters may
purchase and sell the securities in the open market. These transactions may
include overallotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters also may impose a penalty bid, under which the syndicate may
reclaim selling concessions allowed to syndicate members or other broker-
dealers for the securities they sell for their account if the syndicate
repurchases the securities in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
securities then offered, which price may be higher than the price that might
otherwise prevail in the open market, and, if commenced, these activities may
be discontinued at any time.
If we use dealers in any of the sales of securities covered by this prospectus,
we will sell those securities to dealers as principals. The dealers may then
resell the securities to the public at varying prices the dealers determine at
the time of resale. The names of the dealers and the terms of the transaction
will be described in a prospectus supplement.
Agreements with Selling Security Holders permitting use of this prospectus may
provide that any such offering be effected in an orderly manner through
securities dealers, acting as broker or dealer, selected by us; that Selling
Security Holders enter into custody agreements with one or more banks with
respect to the securities offered; and that sales be made only by one or more
of the methods described in this prospectus, as appropriately supplemented or
amended when required. The Selling Security Holders may be deemed to be
underwriters within the meaning of the Securities Act.
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Upon the Company's being notified by a Selling Security Holder that it proposes
to make a block trade, a prospectus supplement, if required, will be filed
pursuant to Rule 424 under the Securities Act, disclosing the name of the
broker or dealer, the number of shares of common stock involved, the price at
which such shares of common stock are being sold by such Selling Security
Holder, and the commissions to be paid by such Selling Security Holder to such
broker or dealer.
We may sell the securities directly or through agents we designate from time to
time. Any agent involved in the offer or sale of the securities this prospectus
covers will be named, and any commissions payable by us or by the Selling
Security Holders to an agent will be described, in a prospectus supplement
relating thereto. Unless otherwise indicated in a prospectus supplement, any
such agent will be acting on a best efforts basis for the period of its
appointment.
Agents, dealers and underwriters may be entitled under agreements entered into
with us or with the Selling Security Holders to indemnification by us or by the
Selling Security Holders against certain civil liabilities, including
liabilities under the Securities Act, or to contribution with respect to
payments which such agents, dealers or underwriters may be required to make in
respect thereof. Agents, dealers and underwriters may be customers of, engage
in transactions with, or perform services on behalf of us in the ordinary
course of business.
We or the Selling Security Holders may sell the securities directly to
institutional investors or others, who may be deemed to be underwriters within
the meaning of the Securities Act with respect to any sale thereof. The terms
of any such sales will be described in a prospectus supplement.
If so indicated in a prospectus supplement, we will authorize agents,
underwriters or dealers to solicit offers from certain types of institutions to
purchase securities from us at the public offering price set forth in the
prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. These contracts will be
subject only to those conditions we set forth in the prospectus supplement, and
the prospectus supplement will describe the commission payable for solicitation
of such contracts.
Each series of debt securities we offer will be a new issue of securities and
will have no established trading market. The securities may or may not be
listed on a national securities exchange. No assurances can be given that there
will be a market for the securities.
Our outstanding shares of common stock are listed on the AMEX under the symbol
"MRS." Any additional common stock we issue will also be listed on the AMEX.
Legal Matters
Certain legal matters relating to the validity of the debt securities,
preferred stock, common stock and warrants will be passed upon by Porter &
Hedges, L.L.P., Houston, Texas. Any underwriters will be advised about other
issues relating to any offering by their own legal counsel.
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Experts
Our consolidated financial statements as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 incorporated by
reference in this registration statement and prospectus, have been audited by
Hein + Associates LLP, certified public accountants, as set forth in their
report, incorporated by reference herein, in reliance upon the authority of
said firm as experts in accounting and auditing.
The combined financial statements of the AlaTenn Subsidiaries as of December
31, 1996 and 1995 and for the three years in the period ended December 31,
1996, incorporated by reference in this registration statement and prospectus,
have been audited by Hein + Associates LLP, certified public accountants, as
set forth in their report, incorporated by reference herein, in reliance upon
the authority of said firm as experts in accounting and auditing.
The historical summary of revenue and direct operating expenses of the Koch
Hydrocarbons Company--Harmony Gas Processing Plant for the year ended December
31, 1995, incorporated by reference in this registration statement and
prospectus, have been audited by Hein + Associates LLP, certified public
accountants, as set forth in their report, incorporated by reference herein, in
reliance upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Republic Gas Partners, L.L.C. and
Subsidiaries as of September 30, 1997 and December 31, 1996 and for the twenty-
one month period ended September 30, 1997, incorporated by reference in this
registration statement and prospectus, have been audited by Hein + Associates,
LLP, certified public accountants, as set forth in this report incorporated by
reference herein, in reliance upon the authority of said firm as experts in
accounting and auditing.
The historical summary of revenue and direct operating expenses of the Anadarko
Gas Gathering System of El Paso Field Services Company, a business unit of El
Paso Energy Corporation for the year ended July 31, 1998, incorporated by
reference in this registration statement and prospectus, have been audited by
Hein + Associates LLP, certified public accountants, as set forth in their
report, incorporated by reference herein, in reliance upon the authority of
said firm as experts in accounting and auditing.
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[MIDCOAST LOGO]
Midcoast Energy Resources, Inc.
2,000,000 Shares
Common Stock
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
December 8, 1999
CIBC World Markets
Prudential Securities
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You should rely only on the information we have included or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with additional or different
information. If you receive any unauthorized information, you must not rely on
it. We are offering to sell the securities only in jurisdictions where sales
are permitted. You should not assume that the information we have included in
this prospectus supplement and the accompanying prospectus is accurate as of
any date other than the date of this prospectus supplement or that any
information we have incorporated by reference is accurate as of any date other
than the date of the document incorporated by reference.
